By Marius Zaharia and Joshua Franklin
LONDON, March 4 Yields rose on German and other top-rated euro zone bonds on Tuesday after Russia called back troops engaged in exercises near Ukraine, reducing demand for safe-haven assets.
The move higher in yields was capped by expectations the European Central Bank will ease monetary policy further this year and by uncertainty over how the Ukraine-Russia dispute will develop.
Moscow had denied that the exercises, which began last week, had anything to do with events in Ukraine. But President Vladimir Putin said on Tuesday that Russia has the right to use troops to protect Russians living in the region.
Bund futures were last 44 ticks lower at 144.70, having hit their highest since May 2013 at 145.42 on Monday as investors piled into top-rated assets. Ten-year German yields , the benchmark for euro zone borrowing costs, rose 4 basis points to 1.59 percent.
Equivalent Austrian, Dutch, Finnish, French and Belgian yields also rose by 2-4 bps.
"The news overnight that Putin has recalled the troops back to base ... that's the main driver of the market. But clearly the situation is very uncertain," said Alan McQuaid, chief economist at Merrion Stockbrokers.
Yields on lower-rated Italian and Spanish bonds remained close to eight-year lows, avoiding the global risk aversion, a further sign worries over the euro zone debt crisis have eased.
"Turn the clock back a few years and these markets would be hit by contagion," said Nick Stamenkovic, a bond strategist at RIA Capital Markets in Edinburgh. "But you see more signs of growth in these countries ...(and) the ECB has backstops in place."
He was referring to the ECB's promise to buy government bonds if a euro zone country gets in trouble. Expectations that the central bank might loosen monetary policy, possibly as early as this week, also prompted investors to put some money in lower-rated assets to maximise their returns.
Spanish 10-year yields fell 4 bps to 3.47 percent, while Italian yields were 2 bps lower at 4.44 percent.