German Bund yields hit one-year lows on weak U.S. data, Iraq fears

Wed Jun 25, 2014 12:06pm EDT

* US economy shows worst performance in 5 years in Q1

* Iraq tensions keep oil prices around $114 a barrel

* German 10yr yields hit lowest levels since May 2013

* Spain, Italy yields also dip, show safe haven appeal (Adds quote, updates prices)

By Marius Zaharia and John Geddie

LONDON, June 25 (Reuters) - German government bond yields fell towards their lowest levels in over a year on Wednesday after weak economic data soothed concerns of a near-term rates rise in the United States and violence in Iraq sent investors on a hunt for safe haven assets.

The U.S. economy contracted at a much steeper pace than expected in the first quarter, data on Wednesday showed, marking the economy's worst performance in five years.

"It was a shocker ... and gives tail winds to the more dovish guys (in the U.S. Federal Reserve)," said David Schnautz, interest rates strategist at Commerzbank.

"It is a reminder that the Fed doesn't want to mess it up by tightening the screws too soon."

Meanwhile, fears that a further rise in oil prices on the back of fighting in Iraq could pose a risk to the global growth outlook, kept oil prices close to $114 per barrel.

"Geopolitical risk has re-entered investors' mind. The events overnight had begun to trouble investors with respect to global growth," Investec chief economist Philip Shaw said.

German 10-year Bund yields fell 6 basis points to 1.26 percent, the lowest level since May 2013. Bund futures rose as much as 79 ticks to hit a day's high of 146.90, having risen by almost two points in the past two weeks.

Concerns related to conflicts in Iraq and Ukraine, as well as the European Central Bank's ultra-easy monetary policy in response to stubbornly low inflation have led to an unexpected fall in Bund yields this year.

Bund yields started 2014 at roughly 2 percent and polls of bond investors predicted at the time they would rise further by the end of the year as the global economy recovered and the Federal Reserve moved to end its unprecedented stimulus programme that had boosted financial assets worldwide.

"We have been surprised, as have many other investors, by long-term core government bond yields continuously scoring new lows," Pioneer Investments CIO Giordano Lombardo said.

"It seems to us that today there is a strong consensus in the market that short- and long-term interest rates are going to stay low for a long time, as a result of permanent low growth."

Lombardo said, however, that he believed economic conditions were slowly normalising and could lead to higher yields in time.

ITALY SALES

Yields on the euro zone's lowest-rated bonds edged a touch higher, but Spanish and Italian debt once again proved its appeal even in times of stress.

Greece and Portugal's 10-year bond yields edged up 1 basis point to 5.85 percent and 3.48 percent , respectively.

Spain and Italy's equivalents, however, dropped 2 bp and 3 bp, respectively, to 2.65 percent and 2.74 percent , respectively.

This bodes well for Italy which is due to sell up to 8 billion euros of bonds on Friday after offloading 3.5 billion euros of inflation-linked debt and zero-coupon bonds on Wednesday.

Italy has completed more than 60 percent of its 2014 funding programme, while Spain has completed more than 70 percent of its plan as the bloc's most indebted governments try to exploit record low borrowing costs to build financing buffers.

Debt managers in Spain, Italy and Portugal said on Tuesday they planned to push ahead with measures to raise the average life of their debt and manage redemptions in a bid to quell concerns about a large refinancing hump. (Editing by Alison Williams)

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