BIS 75th Annual Report
VI. Financial markets

27 June 2005

Conditions in global financial markets eased during the financial year, despite a significant tightening of monetary policy in the United States; long-term rates in the major markets fell, equity prices rose and credit spreads narrowed. Investors in credit and equity markets were confident about corporate profits and the macroeconomic outlook, underpinned by significant improvements in fundamentals. In credit markets, structural changes that have facilitated hedging and promoted liquidity may also have contributed to the low level of spreads. The willingness of investors to accept greater risk was also a key source of support for credit and equity valuations. The juxtaposition of low yields with a seemingly robust economy and rising policy rates was something of a puzzle. Contained inflation expectations and diminished uncertainty about the course of monetary policy helped to keep yields down; more technical supply-demand factors may also have played a role.