Credit markets ended the week on a high after a WSJ report reiterated that the US Federal Reserve is unlikely to raise interest rates for some time, even if it does start to taper QE.

Spread direction is beholden to monetary policy expectations, but these are about as stable as a gazebo in the wind. Today's rally appears to be predicated on a feeling that Ben Bernanke will strike a dovish tone in next week's post-meeting press conference.

However, earlier this week the conventional wisdom was that a tapering of QE was inevitable in the coming months and this would have a detrimental effect on risk assets. In truth, the WSJ article doesn't contradict either view, and in fact says little that we didn't already know. But such is the febrile nature of the market that it is reacting strongly to the most tenuous pieces of news.

The Markit iTraxx Europe started the week at 104.28bps, widened to 114bps midweek and then rallied on Friday and looked set to close around 108bps.

It is therefore no surprise that volatility is on the rise. The Markit VolX Europe index, which tracks realised volatility on the Markit iTraxx Europe, hit 63% this week, its highest level since November 2011. This was more or less matched by volatility in the Markit iTraxx Crossover.

High-beta names in the mining and banking sectors are the most affected by the oscillations, particularly as they often have exposure to emerging markets, where volatility has been at its most extreme.

Take Indonesia, for example. The sovereign's spreads widened from 125bps on May 8th to 231bps by June 13th - a move of some magnitude, even by emerging market standards. However, it rallied by more than 40bps today, and other sovereigns from Asia to Latin America also recovered some ground.

Nonetheless, despite today's hiatus from the recent sell-off, it is probable that the talk of bubbles popping in the wake of QE withdrawal won't go away. Bernanke could boost sentiment with a dovish performance next week, but other Fed officials will no doubt raise the spectre of QE tapering in the coming weeks and months.

Liquidity tends to dry up during the summer, and this will only leave the markets more susceptible to volatility. It could be a bumpy ride ahead.

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