Bond markets have endured one of their worst starts to a year in history. But after this sizeable decline, markets may be bottoming out and could be set up for a major rally in the coming year—particularly if rates crest and the Fed appears likely to rein in inflation. While it’s far too early to embrace this notion, we do expect volatility to drop over the short-to-intermediate term, providing a respite for bond yields and spreads over the next quarter or two. But the surprises we’ve seen over the last few months raise the risk of relying on market beta for returns. We’ll need to continually reassess the balance of geopolitics, growth, inflation, and policy risks. After the first-half volatility, valuations have improved with credit spreads back near pre-pandemic levels. Caution is still warranted over the near term with respect to interest-rate and credit risk, especially as recession risks rise.