Since late April investors have, according to most surveys, built up major money market positions and, as reflected in the current low yield levels, significant long positions in US Treasuries and German Bunds. This flight to safety was triggered in April and May by investor concerns over eurozone sovereign and bank risk and, more recently, by increased expectations of a slowdown in the US economy.

Investor behaviour in the past three months has followed a typical pattern of risk reduction, with capital flows into what are perceived to be the safest assets – i.e. G3 government bonds. A relevant question, however, is whether this perception of safety is likely to change and whether investor capital flows will be directed differently in future times of market and economic stress.

In the US, recent data have shown a clear deceleration in demand and activity, with particularly weak data from the housing sector, while consumer spending has slowed against a background of poor monetary and credit conditions.