LONDON, March 17 (Reuters) - German Bund yields held near eight-month lows on Monday, with tensions between the West and Moscow over the Crimean region’s 96 percent vote in favour of joining Russia at the weekend keeping top-rated assets in demand.
Western powers have said that the vote in the southern Ukrainian province, which came after Russia effectively occupied it following the ouster of Ukrainian President Viktor Yanukovich, is illegal and that they will impose sanctions on Russia.
German 10-year Bund yields, the benchmark for euro zone borrowing costs, last traded flat on the day at 1.55 percent, not far from Friday’s eight-month lows of 1.506 percent.
“The market to some extent expects sanctions now. It depends on what kind of sanctions and (Russia‘s) reaction to the sanctions to see if we can talk of a de-escalation of the crisis or not,” said Piet Lammens, a KBC strategist in Brussels.
The inflation outlook also kept Bund yields anchored at ultra-low levels. Final February inflation figures for the euro zone are at 1000 GMT. Any downward revision from the initial estimate of 0.8 percent - well below the ECB’s target of just below 2 percent - would put more pressure on the European Central Bank to ease policy further.
“We see a little bit of downside risk to the numbers, we think there might be a downward revision, and that should support Bunds as well,” one trader said.
Also keeping the ECB under pressure, banks are set to repay over 10 billion euros of three-year loans taken at the height of the crisis in 2011 and 2012 to the central bank this week, more than twice what was expected.
With banks repaying ECB crisis loans, there has been a fall in the amount of excess liquidity, the cash cushion banks have over what they need for their day-to-day operations.
When liquidity shrinks, money market rates normally rise, effectively tightening monetary conditions - something some in the market say the ECB will eventually have to react to.
All other euro zone bonds were little changed on Monday.