* Bund yields below 1 pct, then reverse losses
* Russian aid convoy enters Ukraine without permission
* EU, Nato condemn action but Ukraine says will not use
* Fed Chair Yellen says remains cautious about rates rise
(Adds fresh quote, updates prices)
By Marius Zaharia and John Geddie
LONDON, Aug 22 German Bund yields dropped close
to their record lows below 1 percent on Friday, after Ukrainian
authorities said 90 trucks from a Russian aid convoy had crossed
the border without permission.
The latest development in the Ukraine crisis, which has led
Russia and the West to impose economically damaging sanctions on
each other, initially prompted investors to seek refuge in
top-rated assets. Market anxiety appeared to abate as the
afternoon session ended.
The EU has urged Russia to reverse what it called a clear
violation of the border, while Nato said Moscow's actions only
worsen the conflict. Ukraine said it will not use any force
against the Russian convoy, to avoid provocations.
The Ukraine situation overshadowed a speech by Fed Chair
Janet Yellen at an annual central bank conference in Jackson
Hole, Wyoming, where she reiterated weakness in the U.S. labour
market meant the Bank should move cautiously in determining when
interest rates should rise.
"Yellen today has played a bit of a junior role, and
geopolitics have come to the fore," Commerzbank rate strategist
David Schnautz said.
German 10-year Bund yields were down nearly 3
basis points at the day's low of 0.964 percent after the initial
Ukraine shock, coming close to their record low of 0.952
percent. By 1530GMT those losses had been reversed.
European Central Bank President Mario Draghi - who speaks at
1830GMT - is under pressure to use his last remaining policy
tool: printing money. The euro zone is faced with near-zero
inflation and a stagnating economy, but few strategists expect
anything startling from his Jackson Hole speech.
The ECB cut all its interest rates in June and will offer up
to 1 trillion euros of cheap four-year loans to banks
(TLTROs)from September. Draghi has said he wants to see the
results of those measures before taking new steps.
"Slow growth ahead ... will keep hopes up that the ECB will
start a full-scale QE programme," said Suvi Kosonen, an analyst
at Nordea, referring to quantitative easing, the technical term
for central bank asset purchases.
"Draghi will most likely stay dovish, but we expect no
promises of new measures at this point with the TLTROs still
about to materialise. So no 'whatever it takes' 2.0 coming up
FLIPPING FRESH COINS
Other euro zone yields also held relatively steady around
historic lows. Spanish and Italian
yields were flat at 2.40 percent and 2.59 percent respectively.
Such low borrowing costs for countries that have a combined
debt of 3 trillion euros, are struggling to grow and have no
inflation raise questions about the sustainability of a
two-year-old rally sparked by Draghi's promise in 2012 to do
'whatever it takes' to save the euro.
Some observers such as the Bank for International
Settlements, the so-called central bank of central banks, see
the rally as a potential bubble which might burst once money
gets more expensive, especially in the United States.
But a weak correlation between Spanish and Italian yields
with their U.S. counterparts is reassuring.
The ECB's stance also helps the euro zone bond market to
de-couple from the one across the Atlantic.
"In essence, growth and inflation surprises would help
sovereign credit risk through supporting debt sustainability,
while the absence of growth and inflation will spur further ECB
accommodation," Societe Generale rate strategist Ciaran O'Hagan
said in a note.
"So heads, prices rise and tails, yields fall."
(Graphic by Monica Ulmanu; Editing by Toby Chopra, Larry King)