Declining spreads have, no doubt, been helped along by the beneficial effect of the balance sheet improvements on measures of credit quality. Indicators such as rating changes and default rates, though still elevated, have eased notably this year.
In another sign of improved sentiment, money has flowed into risky securities - for example, equity mutual funds have registered strong net inflows since March after net outflows in 2002 and early 2003, and extremely large inflows have boosted assets of high-yield bond funds nearly 15 percent over the same period.