The European Central Bank announced late Sunday that it will take steps in the bond markets to help stabilize the economies of Italy and Spain.
Specifically, the bank pledged to buy up Italian and Spanish bonds. Bank officials are hoping the move will help avoid the need for massive bailouts of the world's seventh and twelfth largest economies.
Italy and Spain's stock markets responded positively to the announcement Monday morning, causing borrowing costs for the two nations go down in early trading.
"The ECB bond buying will stop the collapse of the bond market in countries under stress, which was unfolding in a self-fulfilling manner, and buys a significant amount of time," said Jacques Cailloux, the chief Europe economist at RBS in London in a note to clients.
"The ECB intervention will in our view bring an immediate tightening in Spanish and Italian bond spreads of the order of 100 to 150 basis points," Cailloux added.
He predicted that "In the absence of liquidity, investors will sell Germany and German bond futures initially, although recession risks should cap the sell-off in the region of 2.75 percent in the 10 year."
Meanwhile, most global stocks sank again on news of the downgrade of U.S. debt.
"Investors are concerned about a rising risk of global recession, credit downgrades especially now in the Eurozone, such as France, the threat of a major bank bust and a global liquidity trap as investors stay in cash," said Neil MacKinnon, global macro strategist at VTB Capital.