* Any tougher Russia sanctions seen hitting German growth
* Spanish yields hit record lows as ECB seen supporting
* Lower-rated euro zone bond yields flat to lower
(Updates with Spanish yields hitting new lows, fresh quote)
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, July 23 German bond yields fell back
towards record lows on Wednesday as worries over the threat of
tougher EU sanctions on Russia and their potential impact on the
euro zone's feeble economic growth underpinned demand for Bunds.
Growth concerns lead to expectations that the European
Central Bank would act to support the economy if needed,
boosting demand for high-yielding assets as well and pushing
10-year Spanish yields to new record lows.
The European Union threatened Russia on Tuesday with harsher
sanctions over Ukraine that could inflict wider damage on its
economy following the downing of a Malaysian airliner, but it
delayed action for a few days.
The sanctions could hit the European economy as well, with
Germany most at risk given its strong trade links with Russia.
German 10-year yields fell 3 basis points to 1.147 percent
, not far from the record low of 1.126 percent hit
at the height of the euro zone debt crisis in mid-2012. Other
top-rated euro zone bond yields were down by a similar amount.
"The market remains nervous because of the geopolitical
environment and Bunds look well underpinned at this juncture,"
said Nick Stamenkovic, a strategist at RIA Capital Markets.
"The EU are talking tough but they are not taking any
further action imminently. But clearly if the situation
deteriorates further between Russia and the EU then further
sanctions are possible and that would have ramifications for the
euro area economy, especially Germany."
Market participants also expect some of the hefty bond
redemptions and coupon repayments, estimated at over 40 billion
euros, due at the end of the month from Spain and Italy keep
supporting euro zone bonds.
Italian 10-year yields fell 4 bps lower at 2.74 percent
while Spanish equivalents hit a new
record low at 2.547 percent.
Underpinning demand for high-yielding assets, minutes from
this month's Bank of England meeting showed policymakers
remained concerned that raising rates too early might hurt the
"The BoE is seen as the most likely to hike rates at some
point of the top three central banks, so the market is probably
relieved that they remain relaxed," said Alan McQuaid, chief
economist at Merrion Stockbrokers.
Yields on shorter-dated euro zone bonds were also a touch
lower. Some market strategists had expected a fall in spare cash
in the banking system as banks repay a bumper 21 billion euros
in emergency loans to the ECB and a lower-than forecast take-up
of one-week loans to push money market rates and short-term
bonds yields higher.
Excess liquidity was expected to fall below 100 billion
euros for the first time since May. However, there was little
sign of stress.
Other strategists said short-term yields and money market
rates were likely to remain subdued as excess liquidity was set
to get a boost in September when the ECB offers banks a fresh
round of cheap four-year loans.
"The fact that there's a possibility of a huge rise in
liquidity in September will cap any upward pressure in Eonia and
short-term rates driven by a fall in excess liquidity," said
Alessandro Giansanti, a strategist at ING.
The euro overnight interbank lending rate edged
down to 0.04 percent on Tuesday from 0.048 percent on Monday,
staying near the upper end of the 2 to 5 basis point range it
has traded in during the last month.
(Editing by Nigel Stephenson)