Given the empirical patterns described above, the path towards monetary normalisation may be associated with a certain reversal of previous dynamics. Note, however, that all empirical experiences are based on periods when balance sheets were expanding. The exit from QE is thus somewhat uncharted territory.

Two effects of monetary normalisation seem likely, however. Firstly, gradual tightening should have a moderating effect on HY bond issuance volumes because liquidity will became scarcer and the opportunity costs of capital will rise. Secondly, the idea to simply refinance old debt may lose appeal. The share of proceeds used to expand businesses may thus increase. The high-yield bond market may lose speed but gain economic traction.

The key challenge for monetary authorities will be to set a course that is commensurate with the economic outlook. Risk assets in general should benefit from a stronger economy arguably outweighing the impact from a cut in liquidity supply. Too aggressive tightening, however, would weaken the recovery.

Eoin Treacy's view With Lawrence Simpson throwing his hat in the ring to become Fed Governor the field can be considered open as to who follows Ben Bernanke and the monetary outlook is therefore uncertain. We do not yet know how long tapering will take once implemented.

On the assumption that the ability of corporations to engage in balance sheet optimisation will be curtailed, we can anticipate that the supply of bonds will decline from the record high levels of the last few years. The potential for spreads to widen further should also increase as government lending costs increase. (Also see Comment of the Day on July 4th)

BB spreads rallied from a late May low near 260 basis points to break the more than yearlong progression of lower rally highs. It is currently unwinding its short-term overbought condition and the spread will need to find support above the May low if potential for further expansion is to be given the benefit of the doubt.