Global investors hunkered down in the bunkers of world markets have made their first tentative moves to re-emerge blinking into the sunlight even though the coast is still far from clear.
As markets move into the heart of traditionally thin but often volatile August vacation period, investor anxiety has been eased by the prospect of a firebreak in the euro crisis, more monetary stimulus from the world's big central banks and some stabilisation of economic data and earnings forecasts.
And the seasonal political holidays across Western capitals over the coming weeks probably reduce what traders call "event risk".
In its place, a data release slate topped by likely news of a contraction of euro zone gross domestic product in the second quarter and more up-to-date signals on US inflation, retail, business sentiment and housing will vie for attention. So too will the at-once inflationary and demand-sapping latest spikes in oil and food prices, where Brent crude oil priced in euros is now back close to record highs.
But perhaps the most significant event of the week gone by and looming over the next seven days was a sharp jump-back in historically low yields on "safe haven" US Treasury bonds for the first time in several months after lukewarm auction of 10-year debt Stateside.
There was similar backup in yields on the intra-euro haven of German government bonds too.
Reasons for the tepid demand ranged from an ebbing of euro fears after the European Central Bank's plan to support euro sovereign debt markets, concern about demand for Treasuries from overseas central bank reserve managers whose accumulation of hard currency has eased and inflation anxiety after another jump in oil and food prices.
But the weeks ahead will be an important test of the extent to which this presages a long-term shift in the investment herd's dominant risk-averse behaviour, not least with holdings of top-rated government debt already at extreme and historic highs according to Reuters asset allocation surveys.
"We'd certainly be light on core sovereign bonds in the US and Europe and don't see the valuation case for them at all even given the risk-aversion argument," said Richard Batty, investment director at Standard Life Investments in Edinburgh, adding that corporate credit remained more attractive.
Batty said there was significant "trading risk" of a further rise in yields, even though he saw a trough-to-peak jump of about 100 basis points the limit of any move and 2.5 percent 10-year US Treasury yields the maximum acceptable by the US Federal Reserve - who would consider further quantitative easing at that point. "A backup of about a 100bp would be about the limit of what the authorities would tolerate," he added. "There are just so many global and domestic economic headwinds to a sustained sell-off in bonds."
Ten-year Treasury yields slipped back on Friday as surprisingly weak Chinese July export data illustrated the weakness of the world economy but they set two-month highs during the week at 1.7310 - a jump of 33 basis points in just two weeks.
But with yields and coupons on this "safe" debt now well below inflation, sharp moves like that underscore the growing risk for asset managers remaining in these low-yielding bunkers.
A sustained jump of 100 basis points in 10-year Treasuries over a year, for example, would lead to a total returns loss of about 7 percent loss - quite a hit for conservative asset managers seeking safety.
The impact on near-zero or even negative yielding German government bonds of five-year or less maturities is even sharper.
The relief of capital preservation if held to maturity and the lower volatility of these assets compared with equity, for example, is still sufficient draw for long-term managers, but the growing two-way risks are now balancing the view if global financial scares are abating.
Many remain cautious about what could go wrong, however. Nick Gartside, J. P Morgan Asset Management's Chief Investment Officer for Fixed Income, said it's hard to judge the durability of market moves during August and worries that some of the lowest levels on market volatility gauges since the Spring are merely ripe for a turn.
"Our concern is that markets, distracted by the Olympics and unusually clement weather, may be complacent. If we follow the pattern of 2011, September is likely to be hot. For that reason portfolios remain defensive."
While some more upbeat economic news relative to expectations, as seen in the rise in Citi's G10 economic surprises index, has helped sentiment, the biggest spur to risk appetite has been last week's ECB pledge to consider euro zone sovereign bond buying in return for agreed budget programs. Since just before ECB chief Mario Draghi first flagged the shift on July 26, two-year Spanish government yields have been crushed by about 300 basis points and even 10-year Spanish yields shed more than 80 basis points. The Italian story is broadly similar. Euro stocks are up a whopping 12 percent over that time, global stocks are up almost 7 percent and Wall Street equity record its highest levels since May 1 - just a whisker from 2012 highs.
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