LONDON Aug 12 German Bund yields stabilised
near record lows on Tuesday with investors expecting a sharp
fall in a closely watched survey on morale in the euro zone's
biggest economy after Western nations imposed sanctions on
A flight to quality that had pushed Bund yields to all-time
lows last week began losing some of its steam after Russia
stopped military drills on its eastern border with Ukraine. But
tension began to build again with reports that Russia was
sending an aid convoy into eastern Ukraine,
which could support underlying demand for assets perceived as
Economic sanctions between Russia and the West over the
violence in Ukraine are expected to take their toll on the euro
zone's already feeble economic recovery. Germany's ZEW survey of
investor morale will provide the latest snapshot of the
potential fallout from Ukraine and the Middle East. The ZEW
index is seen falling to 18.2 this month from 27.1 last month.
"We are looking for a hard drop in the index as geopolitics
is taking a toll. This comes before second-quarter GDP data on
Thursday and this may form a picture that there are cracks in
the euro zone recovery," said Commerzbank strategist Rainer
"Against this backdrops there will be fundamental tailwinds
for Bunds. We still see Bunds supported even at these low levels
in yields ... that's why our recommendation is to stay long in
Bund yields, the benchmark for euro zone
borrowing costs, were unchanged on the day at 1.07 percent, not
far from an all-time low of 1.024 percent reached last week.
Yields on other top-rated euro zone bonds were also steady.
Many in the market expect Bund yields to fall further to a
low of 1 percent if the slowdown in euro zone growth is
confirmed and against the backdrop of a European Central Bank
that is holding fire for now on further policy easing.
"Bunds are not expensive at 1 percent if growth momentum is
slowing, whilst the ECB continues to make a policy error of
timidity at the zero bound. Both conditions need to be reversed
for us to sell Bunds and neither seems likely in 2014," RBS
strategists said in a note.
Yields on 10-year Spanish and Italian bonds were each 1
basis point up at 2.56 percent and 2.80 percent
(Editing by Larry King)