Plane crash in Ukraine pins German Bund yields near record lows

Fri Jul 18, 2014 8:06am EDT

(Updates prices, adds more comments)

By Marius Zaharia

LONDON, July 18 (Reuters) - German Bund yields fell to near record lows on Friday as investors bought assets perceived as safe havens after the shooting down of a passenger plane over eastern Ukraine, heightening tensions between Russia and the West.

Israel's stepping up early on Friday of its ground offensive in Gaza also fed a rise in risk aversion among investors.

German Bund yields fell 1 basis point (bps) to 1.15 percent, having fallen as low as 1.137 percent overnight. They were within a whisker of their record low of 1.126 percent, hit in July 2012 at the height of the euro zone debt crisis.

"These are tragic events but we've seen in the past that geopolitical factors can drive markets one day but they don't have a lasting effect," KBC strategist Mathias van der Jeugt said.

The limited moves were a sign investors were waiting to see what happens next before deciding whether to buy more safe haven assets, he said.

Bund futures rose 16 ticks to 148.36, having hit an all-time high of 148.48 overnight.

World leaders demanded an international investigation into the plane crash, which killed all 298 people on board, with the United States demanding a ceasefire between Kiev and pro-Russian separatists to allow the inquiry to take place.

The disaster might intensify international pressure to resolve the crisis in Ukraine, which has killed hundreds since public protests toppled the Moscow-backed president in Kiev in February and Russia annexed the Crimea a month later.

Western leaders have already tightened economic sanctions on Moscow for what they say is its failure to rein in the violence.

Some investors said markets were relatively calm in the aftermath of the Ukraine and Gaza events because they expected central banks to ease their monetary policy further if there was any risk to global growth.

"There's no question that markets have been desensitised ... from geopolitical evens by the perception that central banks will be supplying liquidity in an open-ended way," Smith & Williamson director for fixed income, Robin Marshall, said.

RELENTLESS YIELD HUNT

Yields on lower-rated euro zone bonds were steady to a touch higher, reversing most of their earlier rise - more evidence of how relentless the hunt for yield is in an environment of record low European Central Bank (ECB) interest rates.

Portuguese 10-year yields were last 2 bps higher at 3.73 percent, having traded as high as 3.78 percent. Spanish yields were down 1 bps at 2.62 percent, off the day's highs at 2.68 percent.

Earlier this week, a rise in Portuguese yields caused by worries over the financial health of firms of the Espirito Santo banking family was met with renewed demand from investors hungry for high-yielding assets.

"We remain positive on the periphery," London and Capital head of fixed income, Sanjay Joshi, said.

He said the latest events in Ukraine and Gaza have not prompted him to shift asset allocations, despite the fact that they could increase the risk of further sanctions on Russia, with potential implications for global growth.

"Whatever the ECB does to support the economy will be far more favourable to peripheral markets than core markets," he said. (Editing by Louise Ireland)

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