This Box assesses the sensitivity of household mortgage debt in the euro area, going beyond a simple fixed versus floating distinction concerning the structure of mortgage contracts in individual countries. Issuance of bonds by euro area corporations tapered off, on aggregate, after mid-2001 (see Chart B5.1). This pattern was common across the credit quality spectrum (see Chart B5.2). Notably, even after late 2002, when corporate bond spreads began to respond to the efforts made by corporations to repair their balance sheets, issuance activity only picked up mildly. However, differences in the issuing patterns of firms with high and low credit ratings became apparent after mid-2003. In particular, while the issuance activity of firms with investment-grade ratings increased somewhat, signs began to emerge that the issuance of bonds by firms with sub-investment-grade ratings – debt securities that are sometimes termed "junk bonds" – was increasing significantly. Issuance of these bonds in the second quarter of 2004 surpassed the levels that were seen at the zenith of the boom in euro area corporate bond markets in 2000. Starting from around USD 20 per barrel in early 2002, oil prices had surged to a record high around USD 50 per barrel in October 2004 before declining somewhat in November. For households, rising oil prices can adversely impact real disposable income for discretionary spending. This may impair the ability of highly indebted households to service their debts. For non-financial corporations – particularly those with high levels of energy consumption – rising oil prices can adversely impact on profit margins. In turn, as cash flows deteriorate, the ability of corporations to service their debts may be hampered. Whether or not recent oil market developments pose financial stability risks for the euro area ultimately depends on whether oil prices remain persistently elevated, and on the degree to which the balance sheets of households and firms are affected. Notable declines in the volatilities implied in option prices to relatively low levels took place across a wide range of financial markets after spring 2004 (see Charts B.3.1 and 2). Implied volatility is often used to gauge the degree of uncertainty prevailing in markets, and can provide information on expectations of future financial market stability. Theoretically, implied volatility in bond and equity markets should tend to rise when a business cycle expansion moves into a mature phase, as uncertainty begins to increase about the necessity for monetary policy tightening. Moreover, the onset of rising interest rates typically leads to higher volatility as uncertainty about the future trajectory of interest rates increases. Foreign exchange volatility can be affected if business and interest rate cycles are desynchronised. The future market quiescence implied in the recent pricing of options has been remarkable, given indications of a maturing of the global economic upturn, coupled with rising interest rates, the surge in oil prices, persistently wide global imbalances and ongoing geopolitical uncertainties. This Box assesses some of the factors that appear to have played a role in driving implied volatility lower. While longer-term trends in financial markets are ordinarily underpinned by macroeconomic fundamentals, speculative activity can play an important role in driving short-term trends and volatility. When speculative activity brings about a positioning of the market – whereby investors gain if the market moves in the expected direction – the vulnerability of the market to shocks and the potential for disruption is typically higher than under normal conditions. This can have important financial stability implications if the institutions behind the positions are highly leveraged and systemically important. This Box assesses the role of speculative activity in US bond markets. In 1998 the Russian economy was hit by a severe financial crisis which had strong repercussions on world financial markets. There was a sharp decline in asset prices and a drying up of liquidity in a number of markets, which triggered a widespread policy response. Since then, Russia has seen an unprecedented period of economic growth and monetary stabilisation. These developments spurred rapid growth in the Russian banking sector after 1999. In October 2003 Moody’s granted Russia its lowest investment grade status. As a result, Russian borrowers regained access to international capital markets, bond issuance doubled in 2003 when spreads on Russian securities reached record lows, and claims of BIS reporting euro area banks on Russian borrowers rose substantially (see Table S4). This Box describes the events that triggered the recent spate of turbulence in the Russian banking sector. Contagion across banks is widely perceived to be an important element in banking crises and thus a major systemic stability concern. For example, the private sector rescue operation of Long Term Capital Management (LTCM), which was coordinated by the Federal Reserve Bank of New York, was justified on the grounds of the risk of contagion to banks. Similarly, contagion risks transmitted through the interbank market played a major role in the decisions of the Bank of Japan to react to the failures of major Japanese securities houses in the early 1990s. Generally, however, evidence of the significance of contagion is fairly limited. This special feature analyses the risk of cross-border contagion for large European banks. After the near-collapse of LTCM in September 1998, recently hedge funds have again started to capture the attention of financial stability watchers.