Over the past 18 months, U.S. debt capital markets have
experienced tremendous levels of volatility. Debt issuance has gone
from "full stop" to "full steam ahead" in just
over a year. Government efforts to inject liquidity and stimulate
capital markets are doing just that, but with uncertain
consequences.
Recently, for many classes of bonds, the general trends have
been strong price appreciation, volumes of new issuance at near
record highs, and simple price discovery in a very active market.
Investors are gradually making their way up the risk spectrum in
search of higher yield. As more signs of recovery emerge, financial
institutions should be aware of how these market changes may impact
their portfolio. And because of the strong effects of the stimulus
programs, they should also be ready for the possibility of
unintended and/or uneconomic consequences that may impact their
portfolio values.
