REFILE-Top-rated euro zone bond yields rise as Russia ends army exercise

Tue Mar 4, 2014 4:48am EST

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By Marius Zaharia

LONDON, March 4 (Reuters) - German and other top-rated euro zone bond yields rose on Tuesday as Russia's decision to call back troops engaged in exercises near Ukraine reduced demand for assets perceived as safe havens.

The move higher in yields was capped by expectations the European Central Bank may ease monetary policy further this year and by lingering uncertainty over how the Ukraine-Russia dispute will develop.

Moscow had denied that the exercises, which began last week, had anything to do with events in Ukraine, where Putin has said he has the right to deploy troops to protect Russian compatriots.

Bund futures were last 24 ticks lower at 144.90, having hit their highest since May 2013 at 145.42 on Monday as investors piled into top-rated assets. Ten-year German yields , the benchmark for euro zone borrowing costs, rose 2 basis points to 1.59 percent.

Equivalent Austrian, Dutch, Finnish, French and Belgian yields also rose by 2-3 bps.

"There's an easing of geopolitical tensions," said Piet Lammens, a strategist at KBC in Brussels. "Of course the situation is still very uncertain."

Yields on the lower-rated Italian and Spanish bonds remained close to eight-year lows, showing remarkable resilience to global risk aversion in a further sign worries over the euro zone debt crisis have eased.

"Turn the clock back a few years and these markets would be hit by contagion," said Nick Stamenkovic, a bond strategist at RIA Capital Markets in Edinburgh.

"But you see more signs of growth in these countries ...(and) the ECB has backstops in place."

He was referring to the ECB's promise to buy government bonds if a euro zone country gets in trouble. Expectations that the central bank might loosen monetary policy, possibly as early as this week, also prompted investors to put some money in lower-rated assets to maximise their returns.

Spanish 10-year yields fell 1 bps to 3.50 percent, while Italian yields were flat at 4.46 percent.

"The hunger for yield is still enormous," KBC's Lammens said.

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