Growth scare kicks German 10-year yields below 1 pct for first time

Thu Aug 14, 2014 6:46am EDT

* German 10-year yields briefly trade below 1 pct
    * French, Spanish 10-yr yields hit record lows
    * German Q2 GDP surprisingly contracts; France stagnates

 (Updates prices, adds fresh comment)
    By Emelia Sithole-Matarise
    LONDON, Aug 14 (Reuters) - German 10-year bond yields
briefly traded below 1 percent for the first time on Thursday as
the euro zone's economic recovery stalled in the second quarter,
bolstering bets for fresh stimulus from the European Central
Bank.
    Spanish and French bond yields also plumbed record lows as
the bloc's grim growth outlook increased pressure on the ECB to
eventually print money to support an economy bracing for the
impact of tit-for-tat sanctions between the West and Russia.
    A surprise 0.2 percent contraction in economic output in
Germany, the euro zone's growth engine, and a stagnation in
France halted the currency bloc's recovery. Analysts polled by
Reuters had expected the euro zone to eke out a 0.1 percent
quarterly expansion. 
    The data sounds a warning for the coming quarters, when
tough sanctions imposed on Russia in July over its involvement
in the Ukraine crisis start to bite.
    "Disappointing euro area growth and intensifying
disinflation pressures increase the pressure on the ECB for
further action in coming months," said Nick Stamenkovic, a
strategist at RIA Capital Markets in Edinburgh.
    "However, an early move is unlikely as the ECB assesses the
impact of the September four-year LTROs (long-term cheap loans
to banks). But if the economy disappoints in the second half 
then the pressure on the ECB to start QE (money-printing) in
early 2015 will intensify."
    German 10-year yields, the benchmark for euro zone borrowing
costs, briefly fell to an all-time low of 0.988 percent,
according to traders who contribute to trading platforms on
Tradeweb and Bloomberg. The yield was last 2 bps
down at 1.011 percent.  
    French and Spanish 10-year yields hit record lows of 1.392
percent and 2.42 percent 
respectively.
    
    SUSTAINED LOWS
    Pressure on the ECB to act is already mounting as inflation
in the euro zone remains subdued. French Finance Minister Michel
Sapin urged the central bank in an op-ed in French daily Le
Monde to do more to combat deflationary risks and make the euro
more competitive. 
    Against that backdrop and combined with uncertainty over
turmoil in the Middle East and Ukraine, many in the market
expect yields on Bunds, perceived as a safe haven in times of
turmoil, to stay pinned at ultra-low levels.  
    "The level here, plus or minus, could be sustained for quite
a while ...It will take quite some moves in the market and
especially on hard data to give yields a hard push upwards from
here," said Simon Fasdal, head of fixed income trading at Saxo
Bank.
    A report showing Germany reduced its roughly 2 trillion
euros of public debt last year for the first time since post-war
records began in 1950 added to a growing view of reduced supply
pressure for the market in the coming year. 
    The Federal government has already said it is aiming to have
no new borrowing next year as record tax revenues and
rock-bottom interest rates have reduced the burden of serving
the country's 1.3 trillion euros of federal debt.
 

 (Editing by John Stonestreet)
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