German yields rise as Ukraine, Mideast tensions ease, but backdrop fragile

Mon Aug 11, 2014 3:59am EDT

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By Marius Zaharia

LONDON Aug 11 (Reuters) - German bond yields bounced off record lows on Monday after Moscow said late on Friday it had finished military exercises near Ukraine criticised as provocative by the West, curbing flows into assets perceived as safe havens.

But talk of a ceasefire in Ukraine, a possibility raised by a pro-Russian separatist leader on Saturday, evaporated as government forces pushed to recapture Donetsk.

In the Middle East, Israel and the Palestinians agreed on Sunday to a new 72-hour truce in Gaza.

In Iraq, U.S. air strikes against Islamic state targets were seen by some analysts as aiding stability, curbing risks of oil supply disruptions from OPEC's second-largest producer.

"There has been a slight easing in (global) geopolitical tensions but the underlying situation ... remains fragile," said Nick Stamenkovic, bond strategist at RIA Capital Markets.

Bund futures fell 23 ticks to 149.25, with 10-year German yields rising 2 basis points to 1.07 percent, having hit a record low of 1.024 percent on Friday.

BUSY AUGUST?

The conflicts in the Middle East and Ukraine have kept traders on their toes at the start of a month known for very low activity due to the summer holidays in the northern hemisphere.

Last week's volumes in Bund futures were, at 3.5 million lots, the largest since June and above a weekly average of just below 3 million in 2014. Volumes in Italian BTP futures were the highest since May at just below 360,000 lots.

Spanish and Italian 10-year yields each fell 3 basis points to 2.55 percent and 2.81 percent, respectively.

Italy's Senate has passed on Friday a first reading of a hotly contested constitutional reform bill backed by Prime Minister Matteo Renzi.

The slow speed of Italy's reforms came under closer scrutiny in financial markets last week after data showed the euro zone's third-largest economy slipping back into recession.

"Structural measures promised by Renzi are still to be seen, and with last week's poor GDP numbers the time is running out," said Suvi Kosonen, an analyst at Nordea. (Reporting by Marius Zaharia, editing by John Stonestreet)

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