* Investors seek safe havens amid escalation in Ukraine
* German Bund yields see biggest daily fall since Sept
* Italy slips back into recession as Q2 GDP unexpectedly
(Updates prices, adds fresh analyst comments)
By Marius Zaharia
LONDON, Aug 6 German Bund yields fell to record
lows on Wednesday as investors sought refuge in top-rated assets
after Russia appeared to step up military exercises near its
border with Ukraine.
Data showing Italy unexpectedly slipped back into recession
in the second quarter exacerbated worries about the euro zone's
economic recovery, helping to fuel demand for safe-haven
"Geopolitical strains in Ukraine with reports of possible
Russian retaliation are fuelling a flight to quality, and adding
to the risk sentiment was this disappointing data out of Italy,"
DZ Bank rate strategist Christian Lenk said. "These two factors
justify yields moving back towards record lows."
Moscow has massed around 20,000 troops on Ukraine's eastern
frontier, NATO said on Wednesday. The western alliance warned
that Russia might use a humanitarian or peacekeeping mission as
a pretext to send troops across the border.
President Vladimir Putin has ordered his government to
prepare retaliatory measures following the latest round of
Western sanctions, which may include banning European airlines
from flying over Russian territory.
Bund yields fell 8 basis points, their biggest
daily fall since September 2013, to a record low of 1.097
percent. Bund futures were up 89 ticks at 148.90.
Germany sold 2.5 billion euros of five-year bonds at much
lower yields than at a previous sale, with a downbeat inflation
and growth outlook contributing to the solid result.
The European Central Bank meets on Thursday but is not
expected to alter policy. It has signalled it will assess the
effects of June's rate cuts and new long-term loans to banks
(TLTRO) it plans to make in September before taking further
But it is likely to emphasise its readiness to act if the
inflation outlook should deteriorate 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's economy unexpectedly shrank by 0.2 percent in the
second quarter from the first three months of the year, taking
it into its third recession since 2008.
Italy, along with Spain, teetered on the edge of disaster
when the euro zone debt crisis reached its nadir in 2011 and
2012. Now it badly needs growth to help lighten one of the
world's biggest debt burdens, currently at more than 2 trillion
euros. Spain's economy, by contrast, grew 0.6 percent in the
second quarter, its fastest pace since 2007.
The West's sanctions against Russia may also weigh on
Europe. Finland's prime minister said on Wednesday the country
might fall back into economic trouble because of the sanctions.
The poor economic data, coupled with a general preference
for higher-rated assets worldwide, pushed peripheral debt yields
Italian 10-year bond yields rose 6 basis
points to 2.82 percent. Spanish yields rose 3
basis points to 2.59 percent.
Many expect Spanish bonds to keep outperforming their
"Spain has done better than Italy in fundamental terms. We
expect this trend to continue with Spanish GDP outperforming
Italy over the coming three years," Citi strategists said in a
"Trends in the global demand for EGBs (euro zone government
bonds) still suggest a preference to allocations in Spanish
government bonds, but also net buying of Italy has been strong
in the first half of the year. We expect Bonos to continue
outperforming BTPs, albeit at a slower pace compared to 2013."
(Additional reporting by Emelia Sithole-Matarise; Editing by
Catherine Evans, Larry king)