The latter represent those periods in which there was no primary issuance or spread data because the markets were effectively closed. Chart 1 Market functioning “heat map” based on issuance and spreads data(a)  Sources: Bank of America Merrill Lynch Global Research, Bloomberg, Dealogic, JPMorgan Chase & Co. and Bank calculations. (a) Shading is based on a score that reflects, for unguaranteed debt, both issuance (relative to GDP) and spreads in primary markets and secondary markets, expressed as a number of standard deviations from average, using as much data as was available from January 1998. Updated to end-May 2011; recent months use 2011 Q1 GDP. (b) Insufficient data for UK CMBS secondary markets. Since the nadir in late 2008, most markets have been on a course of gradual healing. The heat map shows how issuance and spreads in these particular markets have recovered. Advanced economy corporate bond spreads have fallen back sharply since their peaks  2  BIS central bankers’ speeches  (Chart 2). Measures of volatility and bid-offer spreads across a range of asset classes have also fallen back since the height of the disruption (Charts 3 and 4). And most international equity indices have picked up markedly since their troughs (Chart 5).
Something clearly has to give here – investors know – and must remember – that there is no such thing as a free lunch, and that additional return involves additional risk. The  BIS central bankers’ speeches  9  macro-prudential concern is that the reach for yield encourages financial innovation and growth in some parts of the financial system where the risks are not well understood,10 especially if it leads to greater interconnectedness within the banking system. This is one area which is likely to warrant further attention and analysis by the FPC in due course. Financial innovation and the emergence/growth of new products The financial industry is characterised by its tendency to innovate, continuously designing and offering new financial products to its customers. In my view, financial innovation should be seen as a “good thing” in normal circumstances. It can lead to a more efficient allocation of capital and a reduction in the costs of financial intermediation, both of which should help sustain real economic growth. For example, the rapid growth of electronic trade execution in the foreign exchange market has increased the speed and ease with which trades can be conducted. That should ultimately make international trade cheaper, bringing with it the associated benefits. Improvements in technology can, by facilitating wider market access, also lead to improved price discovery and market liquidity. Moreover, innovation can help issuers align the risk characteristics of new products more closely to those that investors demand.