July 23, 2014 / 11:13 AM / 4 years ago

German yields near record lows as EU mulls harsher Russia sanctions

* Tougher Russia sanctions seen hitting German growth
    * Price moves modest as ECB seen supporting economy
    * Lower-rated euro zone bond yields flat to lower

 (Updates prices, adds fresh analyst comments)
    By Emelia Sithole-Matarise
    LONDON, July 23 (Reuters) - German bond yields fell back
towards record lows on Wednesday as worries over tougher
sanctions on Russia and their potential impact on the euro
zone's feeble economic growth underpinned demand for Bunds.
    The price moves were, however, modest after the European
Union threatened tougher sanctions but delayed action though
harsher steps could hit the Germany economy most given its
strong trade links with Russia. 
    Expectations that the European Central Bank would act to
support the economy if needed underpinned demand for bonds
issued by the currency bloc's weaker economies, keeping their
borrowing costs near historic lows. 
    German 10-year yields fell 2 basis points to 1.15 percent
, not far from the record low of 1.126 percent hit
at the height of the euro zone debt crisis in mid-2012. Other
top-rated euro zone bond yields were down by a similar amount.
    "The market remains nervous because of the geopolitical
environment and Bunds look well underpinned at this juncture,"
said Nick Stamenkovic, a strategist at RIA Capital Markets.
    "The EU are talking tough but they are not taking any
further action imminently. But clearly if the situation
deteriorates further between Russia and the EU then further
sanctions are possible and that would have ramifications for the
euro area economy, especially Germany."
    Market participants also expect some of the hefty bond
redemptions and coupon repayments, estimated at over 40 billion
euros, due at the end of the month from Spain and Italy to be
reinvested in German bonds, keeping yields subdued.
    Italian 10-year yields were 1.5 bps lower at 2.77 percent
 while Spanish equivalents were flat at 2.58
percent, within sight of an all-time low of 2.548 percent hit in
    Yields on shorter-dated euro zone bonds were also a touch
lower. Some market strategists had expected a fall in spare cash
in the banking system as banks repay a bumper 21 billion euros
in emergency loans to the ECB and a lower-than forecast take-up
of one-week loans to push money market rates and short-term
bonds yields higher.
    Excess liqudity was expected to fall below 100 billion euros
for the first time since May. However, there was little sign of
    Other strategists said short-term  yields and money market
rates were likely to remain subdued as excess liquidity was set
to get a boost in September when the ECB offers banks a fresh
round of cheap four-year loans.
    "The fact that there's a possibility of a huge rise in
liquidity in September will cap any upward pressure in Eonia and
short-term rates driven by a fall in excess liquidity," said
Alessandro Giansanti, a strategist at ING.
    The euro overnight interbank lending rate edged
down to 0.04 percent on Tuesday from 0.048 percent on Monday,
staying near the upper end of the 2 to 5 basis point range it
has traded in during the last month. 

 (Editing by Nigel Stephenson)
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