If credit spreads for both investment-grade and high-yield bonds narrowed, it indicates that investors perceived reduced credit risk during this period. A narrowing of spreads suggests "risk-on" sentiment, where market participants become more optimistic, expecting a smooth economic recovery or "soft landing" despite monetary tightening. This can occur when inflation moderates, and growth prospects stabilize, leading to increased confidence in corporate creditworthiness.

A is incorrect: This would indicate heightened risk aversion, typically associated with deteriorating economic conditions, not the observed confidence in a smooth landing.
C is incorrect: Stability would imply little change in market sentiment, which does not align with the narrowing observed during this period.
D is incorrect: While volatility could occur in uncertain environments, the BIS report highlights a trend of narrowing, indicating reduced perceived risk.