Despite the ECB having started to buy Italian and Spanish government bonds, financial markets remain in panic mode. However, the key driver now seems to be rather the threat of another global recession than of another systemic financial crisis. On the one side, growth is weak in the developed world where the sovereign debt crisis forces the weaker countries into austerity measures and prevents the stronger ones from adopting significant fiscal easing programs. On the other, the emerging market countries are still suffering from high inflation rates and have enacted monetary tightening measures to cool the economy and ease inflation pressures, hence they can't yet ride to the rescue as well. In turn, markets are pricing a renewed global recession, sending equity markets, commodities and safe government bond yields sharply lower in turn (with the notable exception of gold).
Looking ahead, it seems that in the developed world only the central banks are left to do the heavy lifting. The BoJ has already intervened to weaken the Yen and also the SNB is injecting more liquidity into the domestic financial market. Additionally, also the ECB is providing longer-term liquidity to the banking sector again. Finally, it seems that over the next few months, both the US Fed as well as the BoE might well do another round of quantitative easing. Overall, this creates another global liquidity glut to support asset prices. Furthermore, as the global banking sector is being backstopped via the massive liquidity injections and also the weaker Eurozone sovereigns are being kept afloat via the bail-out programs and the ECB bond buying, the risk of another systemic financial crisis due to a wave of sovereign and bank defaults should be reduced.
In turn, near-term growth in the developed market world should take a hit (personally, though, I do not see another wide-spread recession). However, also inflation should fall markedly given that the ongoing deleveraging should keep core inflation rates suppressed whereas the implosion in commodity prices should lead headline inflation markedly lower (this in turn should see emerging markets starting to ease policy again before the year is over). Hence, near-term nominal growth rates should be very low. Furthermore, given that the banking sector as well as sovereign are being kept afloat and given that available liquidity should be abundant, volatility should drop markedly again and nominal bond yields should be low not only for the safe governments (such as Germany, US, Switzerland) but pressure towards lower yields should intensify again for the wider government bond segment.