Reduced concerns over recapitalisation has boosted morale

Credit markets have staged an exceptional rally in recent months. The US corporate bond market, for instance, registered record relative returns compared to US Treasuries in April and May (based on the Barclays Capital US Credit Bond Index).

The improving economic outlook and reduced concerns over the recapitalisation needs of financial institutions boosted investor confidence. Indeed, investors were encouraged by the size and scale of governments’ and central banks’ policy action around the globe, leading them to reassess their pessimistic outlook on corporate defaults and the wider economy. Stabilising economic activity and improving lending activity are now encouraging one another. Although we continue to see forceful headwinds for consumer spending, we believe economic activity should continue to stabilise and resume pos...