* Bund futures recoup most of last week's losses
* Other higher-rated euro zone bonds also rally
* Yields on lower-rated Spain, Italy hold around eight-year
* ECB's Thursday meeting eyed; no policy move expected
By Emelia Sithole-Matarise
LONDON, March 3 Top-rated euro zone government
bonds surged on Monday, outperforming the rest of the market as
the threat of war between Russia and Ukraine sent investors
scrambling for safe-haven assets.
Ukraine said Russia was building up armoured vehicles on its
side of a stretch of water closest to the Russian-speaking
region of Crimea after Putin declared at the weekend he had the
right to invade his neighbour to protect Russian interests 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 dropped 5-6 bps.
Yields on Italian and Spanish bonds, whose creditworthiness
is rated lower, also slipped to close to eight-year lows hit
last week on persistent expectations the European Central Bank
will ease monetary policy further this year.
The moves in Bunds mirrored a rally in U.S. Treasuries that
drove benchmark 10-year 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 above-forecast euro zone inflation data
that somewhat cooled bets the ECB would ease 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.
Some banks, such as BNP Paribas, expect the central bank to
embark on a bond purchase scheme similar to the quantitative
easing programme pursued by the U.S. Federal Reserve.
Ten-year Spanish and Italian bonds, the main beneficiaries
of an investor hunt for higher returns given ultra-low yields in
core bond markets, were 0.5 and 2 bps lower at 3.51
and 3.46 percent respectively.
This contrasted sharply with a year ago when lower-rated
euro zone bonds were vulnerable to a sell-off whenever
investors' appetite for riskier assets soured.
"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."
Yields on 10-year Portuguese and Greek bonds, which are held
by emerging market investors so are more vulnerable to turmoil
in that sector, were up 3 to 4 bps at 4.91 percent
and 7.04 percent respectively.