The fight-back against risk aversion continued on Thursday, assisted by more soothing words from central bankers.

William Dudley, the president of the New York Federal Reserve, said that the timeline set out by Ben Bernanke for tapering QE was only "one possible outcome". Dudley's intervention was the latest attempt by the world's monetary authorities to try to stem the recent rise in government bond yields.

So far it seems to have been effective, and the market is now behaving in a more orderly fashion. How long this will last is debatable - the crucial US unemployment figures are due on July 5th.

The situation in China, which has made a significant contribution to recent volatility, has also calmed down. Interbank funding rates have fallen, and the People's Bank of China appears to be providing liquidity to certain banks on a selective basis.

China's CDS spreads tightened 10bps to 116bps, and are now 24bps tighter than the levels reached on Monday. Bid-ask spreads are also compressing after widening sharply, according to Markit's liquidity metrics.

It is still not clear if the breakdown in the interbank market was a transient event or the start of a real shift in Chinese monetary policy. The answer will have important implications for spread direction.

In Europe, the market continued to recover, though the rally lost momentum late in the afternoon. The Markit iTraxx Europe was 1.5bps tighter at 117bps, with banks among the strongest performers.

An EU deal on bank bail-ins was a welcome development, as it removed some policy uncertainty and was another step towards a banking union. However, it does raise questions on the costs of senior unsecured debt for banks.

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