(Updates prices, adds fresh comments)
By Marius Zaharia and Emelia Sithole-Matarise
LONDON Aug 15 German Bund yields held near
their record lows around 1 percent on Friday, with investors
increasingly betting the ECB will ease monetary policy further
to lift a stagnating economy struggling with low inflation.
Data showed on Thursday the euro zone economy failed to grow
in the second quarter even before the sanctions the West and
Russia imposed on each other over the conflict in Ukraine
started to bite.
Russian President Vladimir Putin struck a conciliatory note
on Thursday in Crimea saying Moscow would stand up for itself
but not at the cost of confrontation with the outside world.
However, tensions remained high in Ukraine, where Kiev
government forces were fighting pro-Moscow separatists and
dozens of heavy Russian military vehicles massed near the
Ten-year Bund yields were last 0.4 basis
points higher on the day at 1.018 percent, having briefly dipped
below 1 percent on Thursday, according to traders.
"We look for Bunds to hug the 1 percent yield ... not just
for today, but rather longer," Markus Koch, a Commerzbank
While the ECB is unlikely to take fresh measures in the next
few months, many in the market say it will eventually have to
embark on asset purchases, a monetary policy tool known as
quantitative easing, as pressure mounts on it to act.
Against this backdrop, the market remained biased towards
another downward lurch in Bund yields.
"If QE expectations do accelerate, expect sharper moves
downward in Bund yields but if QE continues to be delayed, this
will also benefit nominal bonds as the market will price
mounting deflation risk and a central bank far behind the curve.
Neither hurts core bonds," RBS strategists said in a note.
Citing their own fair-value models which take into account
inflation, private sector loan growth and manufacturing activity
surveys, they said Bunds were not yet expensive at these levels.
They said they only become so at a yield of 0.96 percent.
Not all in the market share this view. Didier Duret, chief
investment officer at ABN Amro, said such ultra-low yield levels
were reminiscent of the situation in Japan which is going
through a period of prolonged subdued inflation and bond yields.
"At 1 percent you are bound for a negative real yield. This
is Japan-like behaviour which we don't buy here," said Duret. He
does not hold Bunds because "they are not attractive".
(Editing by Andrew Heavens)