March 3, 2014 / 8:41 AM / 4 years ago

German Bunds surge on Russia, Ukraine tensions

* Bund futures recoup most of last week’s losses

* Other higher-rated euro zone bonds also rally

* Spain, Italy yields hold around eight-year lows

* ECB’s Thursday meeting eyed; no policy move expected

By Emelia Sithole-Matarise

LONDON, March 3 (Reuters) - German Bund futures surged on Monday after Russian President Vladimir Putin declared the right to invade Ukraine at the weekend, spurring investors to shun high-risk assets in favour of safe havens.

Ukraine mobilised for war after Putin’s declaration, which increased tensions with the West. Western countries have warned they could slap sanctions on the world’s biggest oil producer if it uses military force on its neighbour following the overthrow last week of Ukraine’s pro-Russian president.

German Bund futures jumped 64 ticks to 145.02 while cash 10-year yields were 5 basis points down at 1.57 percent . The moves in Bunds mirrored a rally in U.S. Treasuries which drove benchmark U.S. yields to a one-month low around 1.59 percent in Asian trade as the geopolitical tensions rocked equity markets.

“The Ukraine situation got severely worse over the weekend and that’s enough to get the market going. That’s the only game in town for now ... With this going on we might get some flight to quality,” a trader said.

Bunds recouped most of last week’s losses, which were triggered by an above-forecast euro zone inflation reading that somewhat cooled bets that the European Central Bank will ease monetary policy this week. Inflation nevertheless remains in the bank’s “danger zone” below 1 percent and way off its target level of close to 2 percent.

PERIPHERY RESILIENT

While the inflation data is expected to stay the ECB’s hand at Thursday’s meeting, money markets expect it to loosen policy later this year if price pressures remain weak as forecast.

Peripheral euro zone bonds, which have benefited from the ECB’s low interest rates, improved outlooks on their creditworthiness, and to some extent from persistent ructions in emerging markets, were steady to a touch firmer.

This a sharp contrast to just year ago when lower-rated euro zone bonds were vulnerable to a sell-off whenever investors’ appetite for riskier assets soured.

Spanish 10-year yields were pinned around eight-year lows at 3.51 percent while Italian equivalents were 1 basis point lower at 3.47 percent, also close to eight-year lows hit last week.

“It looks like now Spain and Italy are also treated as a safe pick-up in a way. It’s very positive that even in such a pronounced risk-off environment with Bunds rallying, peripherals are holding their ground, which is quite remarkable when you think back to prior episodes of the debt crisis,” said Michael Leister, a senior strategists at Commerzbank.

“Fundamentals have really improved and growth has picked up. The overriding theme is investors believe in the ECB’s policies and they are desperate for a yield pick-up so even in this environment it’s a tough trade to short these bonds.”

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