German yields slip towards record lows as Ukraine conflict eyed

Wed Jul 23, 2014 4:19am EDT

By Emelia Sithole-Matarise
    LONDON, July 23 (Reuters) - German bond yields dipped back
towards record lows on Wednesday with conflicts in Ukraine and
the Middle East supporting demand for safe-haven government
bonds.
    Benign U.S. inflation data on Tuesday, suggesting less
pressure for an early rise in interest rates by the Federal
Reserve, helped keep bond yields subdued.
    The European Union is considering tougher sanctions against
Russia over the crisis in Ukraine which escalated after the
downing of a Malaysian airliner last week. These could include
restricting Russian access to European capital markets, defence
and energy technology. 
    The ongoing conflict in the Gaza strip, where Israeli forces
pounded multiple sites and said it was meeting stiff resistance
from Hamas Islamists, also kept investor appetite for risk in
check. 
    German 10-year yields were 1.4 basis points lower at 1.16
percent, nudging back towards the record low of 1.126 percent
hit at the height of the euro zone debt crisis in mid-2012.
    "Investors are quite happy to stay with their Bund
positions. In light of the geopolitical tensions that are not
yet completely resolved in Ukraine and the Middle East there's
not much potential for Bund yields to pop higher any time soon,"
said Christian Lenk, a strategist at DZ Bank.
    Market participants expect some of the hefty bond
redemptions and coupon repayments, estimated at over 40 billion
euros, due at the end of the month from Spain and Italy to be
reinvested in German bonds, keeping yields subdued.
    Yields on peripheral euro zone bonds were flat to a touch
up.
    
    MONEY MARKETS
    Yields on shorter-dated core euro zone bonds were also a
toucher lower as money markets showed little sign of strain from
an expected drop in spare cash in the euro zone banking system
as banks repay a bumper 21 billion euros in emergency loans to
the European Central Bank.
    Some market strategists expect excess liquidity to fall
below 100 billion euros for the first time since May following
the repayment and after banks took a lower-than-forecast amount
of one-week loans from the ECB.
    Others said short-term bond yields and money market rates
were likely to remain subdued as excess liquidity was set to get
a boost in September when the ECB offers banks a fresh round of
cheap four-year loans.
    "The fact that there's a possibility for a huge rise in
liquidity in September will cap any upward pressure in Eonia and
short-term rates driven by a fall in excess liquidity," said
Alessandro Giansanti, a strategist at ING.
    The euro overnight interbank lending rate edged
down to 0.04 percent on Tuesday from 0.048 percent on Monday,
staying near the upper end of the 2 to 5 basis point range it
has traded in during the last month. 

 (Editing by John Stonestreet)
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