Much of the turmoil can be attributed to the sharp monetary tightening pursued by the U.S. Federal Reserve and other central banks as they grappled with the inflationary pressures that took hold in the wake of the COVID-19 pandemic. But Russia’s invasion of Ukraine in late February and the resulting geopolitical frictions also dampened the mood, sending bond spreads wider as investors took fright at the heightened sense of risk, making it more costly to borrow in financial markets. As a result, country authorities in emerging markets currently face difficult choices between sustaining financial stability and supporting growth in an environment of tighter global liquidity, increased geopolitical frictions, and slower global growth.

Unsurprisingly, total fixed-income issuance fell by 16 percent from the previous year. The upheavals and primary market shutdowns did not spare the market for green, social, sustainability, and sustainability-linked (GSSS) bonds, as defined in Box 1.1. Bond issuance in this category fell 13 percent from a year earlier, the first ever decline for this still nascent asset class and a sharp reversal from the 68 percent growth recorded in 2021.

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