* Bund futures recoup most of last week's losses
* Other higher-rated euro zone bonds also rally
* Spain, Italy yields hold around eight-year lows
* ECB's Thursday meeting eyed; no policy move expected
By Emelia Sithole-Matarise
LONDON, March 3 Top-rated euro zone bonds surged
on Monday as the threat of war between Russia and Ukraine sent
investors scrambling for safe haven assets.
President Vladimir Putin declared at the weekend that Moscow
had the right to invade its neighbour to protect Russian
citizens and interests there after the ouster last week of a
pro-Russian president, ratcheting up geopolitical tensions.
Ukraine said Putin's move amounted to a declaration of war
and Western countries have warned they could slap sanctions on
Russia, the world's biggest oil producer, if it resorts to
military force in Ukraine.
German Bund futures jumped 87 ticks to 145.25,
driving cash 10-year yields down 7 basis points to 1.56 percent
. Dutch, French, Austrian, Finnish and Belgian
yields were 5-6 bps lower.
The moves in Bunds mirrored a rally in U.S. Treasuries that
drove benchmark U.S. yields to a one-month low of around 1.59
percent in Asian trade as the geopolitical tensions
rocked equity markets.
"The market is in uncharted territory regarding the
situation between Ukraine and Russia ... and with no past
reference ... volatility is increasing, therefore we have
flight-to-quality which is benefiting core markets," said
Patrick Jacq, a strategist at BNP Paribas.
Lower-risk euro zone bonds reversed last week's losses,
which were triggered by an above-forecast euro zone inflation
reading that somewhat cooled bets that the European Central Bank
would ease monetary policy this week.
Inflation nevertheless remains in the bank's "danger zone"
below 1 percent, a level that could threaten economic recovery
in the euro zone, and way off its target level of just below but
close to 2 percent.
While the inflation data is expected to stay the ECB's hand
at Thursday's meeting, money markets expect it to loosen policy
later this year if price pressures remain weak as forecast.
Peripheral euro zone bonds, which have benefited from the
ECB's low interest rates, improved outlooks on their
creditworthiness, and to some extent from persistent ructions in
emerging markets, were steady to a touch firmer.
This is a sharp contrast to just a year ago when lower-rated
euro zone bonds were vulnerable to a sell-off whenever
investors' appetite for riskier assets soured.
Spanish 10-year yields were pinned around
eight-year lows at 3.51 percent while Italian equivalents were 1
basis point lower at 3.47 percent, also close to eight-year lows
hit last week.
"It looks like now Spain and Italy are also treated as a
safe pick-up in a way. It's very positive that even in such a
pronounced risk-off environment with Bunds rallying, peripherals
are holding their ground, which is quite remarkable when you
think back to prior episodes of the debt crisis," said Michael
Leister, a senior strategist at Commerzbank.
"Fundamentals have really improved and growth has picked up.
The overriding theme is investors believe in the ECB's policies
and they are desperate for a yield pick-up so even in this
environment it's a tough trade to short these bonds."