As US equities fell out of bed in the morning session while Spain vacillated over when to ask for a bailout, investors switched into government debt.

Spain's Prime Minister, Mariano Rajoy, said his government wants to see what the aid conditions are exactly before it commits itself to asking for a bailout from the EU.

Rajoy met earlier in the day with French counterpart Francois Hollande to talk about the debt crisis. Both leaders met several months ago in Rome in a four-way meeting with Italian prime minister Mario Monti and German chancellor Angela Merkel. On that occasion they debated over austerity, growth, and European Central Bank (ECB) intervention. Merkel lost France as a big ally in her call for more austerity with former president Nicolas Sarkozy.

After Thursday's meeting, both men called for the ECB to take action to lower borrowing costs in the Eurozone.

Attention will now switch to Jackson Hole, Wyoming and tomorrow's keynote speech at the central bankers' economic symposium from Fed Chairman Ben Bernanke.

"The market has been subject to a negative bias before tomorrow's main event, where Ben Bernanke is expected to clarify the Federal Reserve's position on expanding its balance sheet. Friday morning's speech in Wyoming will dictate inflationary anticipations, with Mr Bernanke likely to expand and detail monetary policy more so than in its current form," opined David White, a trader at spread betting firm SpreadEx.

"Recent US data points haven't been particularly supportive of a new bond-buying programme, as the labour market remains relatively stable against a backdrop of improved consumer spending. Mr Bernanke has pledged consistently that action will be taken only if the condition of the economy can be seen to worsen from its current state. So, it wouldn't be unreasonable for investors to prepare for a chairman that does what he said he would do," White suggested.

In economic news today, initial jobless claims were unchanged at 374,000 last week, according to the Labor Department, after claims for the week before were revised up by 2,000. Meanwhile, US consumer spending rose by 0.4% month-on-month in July, the biggest rise since February, according to the Commerce Department.

The US Treasury's auction of $29bn worth of seven-year debt saw a high level of enthusiasm from direct bidders, who snaffled up 17.9% of the bonds on offer, the highest proportion in a debt auction in the US since February.

US treasury prices headed higher, except at the short end of the market, as investors sought shelter from volatile equity markets. The yield on the benchmark 10-year Treasury fell to 1.61% from around 1.65% towards the close of trading yesterday.

The decline in the yield on the German counterpart was even more striking, with the 10-year Bund's yield sliding 6/100 of a percentage point to 1.32%. Meanwhile, in the UK, the yield on the 10-year gilt tumbled to 1.45% from around 1.50% the day before.

JH

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