German Bunds yields edge towards all-time lows amid Iraq, Ukraine tensions

LONDON, June 26 Thu Jun 26, 2014 4:15am EDT

LONDON, June 26 (Reuters) - German Bund yields dipped closer to all-time lows on Thursday with demand for safe haven assets expected to remain buoyed by ongoing geopolitical tensions in Iraq and Ukraine.

Government forces and insurgents continued to wrestle for control of Iraq's major oil refineries, keeping the price of oil buoyed which poses a threat to global growth. [ID: nL4N0P70Y0]

Meanwhile, a ceasefire between Russian-speaking rebels and government forces appears to be crumbling, giving a further reason for investors remain conservative, and hold risk-free assets.

"We are close to extremely tight levels in Bunds again... and even some of those that have been holding out are coming in and increasing allocations," said Allessandro Tentori, global head of rates strategy at Citi.

German 10-year yields dipped 1 basis point on Thursday to hit 1.26 percent, nearing the all-time lows of 1.13 percent seen in the summer of 2012.

Others pointed out that with a large number of coupon payments and redemptions next month, German bonds are likely to be one of the main beneficiaries as cash is reinvested.

"At moments like this you don't think markets will go down," said one government bond trader.

A second downwards revision of Q1 U.S. economic growth on Wednesday has also fuelled the rally in German Bunds, although Citi's Tentori said an expected strong rebound in Q2 would likely see a rise in Treasury yields that would reverberate across continents.

For now, though, attention is firmly fixed once again on the health of the euro zone economy, with a preliminary reading of German inflation scheduled for Friday.

Despite the ECB's best efforts on the monetary policy side, persistent weak inflation and the slow pace of growth across the bloc has rekindled speculation that the ECB could launch a programme of large-scale asset purchases - or quantitative easing.

The ECB cut its key interest rates last month and promised more liquidity to banks via long-term loans called targeted long-term refinancing operations or TLTROs, but many think this may still not be enough.

It is this expectation that has pushed borrowing costs in some of the zone's most vulnerable countries near record lows again. Italian 10-year yields also fell 1 bp to hit 2.73 percent, just 3 bps off the record lows of 2.70 percent hit earlier this month. (Editing by Toby Chopra)

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