* German 10-year yields dip near record lows
* Iraq, Ukraine tensions support safe haven bonds
* Growth forecasts slashed in Italy, Austria
* Moody's says Spain tax reforms troubling
(Adds quote, updates prices)
By John Geddie
LONDON, June 26 German Bund yields edged towards
all-time lows on Thursday amid geopolitical tensions and a
weakening euro zone growth outlook which cemented expectations
of a prolonged period of central bank support.
Conflict in Iraq and Ukraine supported the bloc's safest
assets, but with borrowing costs for its weakest states still
near record lows there was little evidence that investors' were
closing riskier bets.
"The power of the ECB is very high, and the fact they can
come with unlimited support to peripheral markets is still
making investors scared of taking short positions," said
Alessandro Giansanti, senior rates strategist at ING.
German 10-year yields dipped 1 basis point on Thursday to
hit 1.26 percent, nearing the all-time lows of 1.13 percent seen
in the summer of 2012.
Strategists said violence in Iraq and a crumbling ceasefire
in Ukraine was supporting demand for Bunds as investors worried
about the wider impact on the global economy. [ID: nL4N0P70Y0]
"We are close to extremely tight levels in Bunds again...
and even some of those that have been holding out are coming in
and increasing allocations," said Alessandro Tentori, global
head of rates strategy at Citi.
Others pointed out that with a large number of coupon
payments and redemptions next month, German bonds are likely to
be one of the main beneficiaries as cash is reinvested.
"At moments like this you don't think markets will go down,"
said one government bond trader.
A second downwards revision of Q1 U.S. economic growth on
Wednesday has also fuelled the rally in German Bunds, although
Citi's Tentori said an expected strong rebound in Q2 would
likely see a rise in Treasury yields that would reverberate
The ill-health of the euro zone economy has helped support
demand for sovereign debt across the bloc, as many believe the
ECB will eventually be forced to launch an asset-purchase
programme - known as quantitative easing - to boost its more
conventional monetary policy efforts.
An Italian employers' lobby and an Austrian think tank both
slashed growth forecasts for their respective countries on
Thursday, while ratings agency Moody's said that Spain's latest
fiscal reform proposals weighed on its credit rating.
A preliminary reading of Germany's June inflation scheduled
for Friday will also be closely watched, with the ECB
particularly concerned about the effect a slowdown in consumer
price rises is having on the bloc's ability to grow.
Despite the uncertain outlook, Italian and Spanish 10-year
yields were unchanged on Thursday at 2.73 percent and 2.64
percent. That is just 3 bps and 9 bps above record lows hit
earlier this month, respectively.
There are those, however, that warn that the market is
getting ahead of itself and that concerns around the solvency of
some of the euro zone's most indebted states will resurface if
growth continues to weaken and fiscal discipline slips.
"Even if these countries are not punished by the market in
the short-term, that underlying question is still there," said
Anatoli Annenkov, senior European Economist at Societe Generale.
(Editing by Toby Chopra)