LONDON Aug 6 Bund yields fell on Wednesday and
an auction of five-year German debt was expected to be firmly
bid as investors sought refuge in top-rated assets as Russia
appeared to step up military exercises near its border with
Polish foreign minister Radoslaw Sikorski said late on
Tuesday Russia has "restored its combat capability" to either
put pressure on Ukraine or to enter it, while Ukrainian
government forces kept up a military offensive to reclaim lost
territory in the country's east.
Russian Prime Minister Dmitry Medvedev threatened to
retaliate for the grounding of a subsidiary of national airline
Aeroflot because of EU sanctions, with one newspaper reporting
that European flights to Asia over Siberia could be banned.
Bund yields fell 2 basis points to 1.15
percent, keeping within touching distance of last month's record
lows of 1.11 percent. Bund futures were up 21 ticks on
the day at 148.22.
"We're going to trade pretty firm on the back of all this
Russian invasion noise," one trader said.
Germany sells up to 3 billion euros of five-year debt later
in the day and a downbeat inflation outlook is also expected to
contribute to solid demand.
The European Central Bank meets on Thursday, but it is not
expected to tweak policy as it has signalled it first wants to
await the results of June's rate cuts and long-term loans to
banks (TLTROs) due in September before making further moves.
But it is likely to reinforce its readiness to act if the
inflation outlook deteriorated further.
"There is no potential for yields to rise significantly in
the near term, given the prospect of dovish comments from the
ECB, the TLTROs in September and given that the economy remains
weak," said Patrick Jacq, rate strategist at BNP Paribas.
Data showed German factory orders fell 3.2 percent in June,
versus expectations of a 1 percent rise.
Italy releases second-quarter gross domestic product data
later on Wednesday. The economy, which carries one of the
world's largest debt burdens, is expected to have grown by 0.1
percent on the year.
Italian and Spanish 10-year debt
yields rose 2 basis points to 2.78 percent and 2.59 percent,
(Reporting by Marius Zaharia, editing by John Stonestreet)