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Russia-Ukraine standoff fuels top-rated euro zone bond rally
March 3, 2014 / 11:51 AM / 4 years ago

Russia-Ukraine standoff fuels top-rated euro zone bond rally

* 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) - Top-rated euro zone bonds surged on Monday as the threat of war between Russia and Ukraine sent investors scrambling for safe haven assets.

President Vladimir Putin declared at the weekend that Moscow had the right to invade its neighbour to protect Russian citizens and interests there after the ouster last week of a pro-Russian president, ratcheting up geopolitical tensions.

Ukraine said Putin’s move amounted to a declaration of war and Western countries have warned they could slap sanctions on Russia, the world’s biggest oil producer, if it resorts to military force in Ukraine.

German Bund futures jumped 87 ticks to 145.25, driving cash 10-year yields down 7 basis points to 1.56 percent . Dutch, French, Austrian, Finnish and Belgian yields were 5-6 bps lower.

The moves in Bunds mirrored a rally in U.S. Treasuries that drove benchmark U.S. yields to a one-month low of around 1.59 percent in Asian trade as the geopolitical tensions rocked equity markets.

“The market is in uncharted territory regarding the situation between Ukraine and Russia ... and with no past reference ... volatility is increasing, therefore we have flight-to-quality which is benefiting core markets,” said Patrick Jacq, a strategist at BNP Paribas.

Lower-risk euro zone bonds reversed last week’s losses, which were triggered by an above-forecast euro zone inflation reading that somewhat cooled bets that the European Central Bank would ease monetary policy this week.

Inflation nevertheless remains in the bank’s “danger zone” below 1 percent, a level that could threaten economic recovery in the euro zone, and way off its target level of just below but 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 is a sharp contrast to just a 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 strategist 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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