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Russian counter-sanctions send German Bund yields to record lows
August 7, 2014 / 10:16 AM / 3 years ago

Russian counter-sanctions send German Bund yields to record lows

* Russia plans to ban some food imports from U.S., Europe

* Risks to European economy give ECB new headache

* ECB not expected to change policy, but Draghi speech eyed (Updates with Spanish auction, more analyst comments)

By Marius Zaharia

LONDON, Aug 7 (Reuters) - German Bund yields hit a record low on Thursday as investors fretted over the impact of Russian counter-sanctions on Europe’s already fragile economic recovery, which gives the European Central Bank another problem to consider.

Russia’s state news agency said on Wednesday that Moscow will ban all imports of food from the United States and all fruit and vegetables from Europe. Russia is by far the biggest buyer of European fruit and vegetables.

The announcement came as fighting intensified on the ground in eastern Ukraine between Kiev’s government forces and pro-Russian separatists and after NATO said Russia had massed around 20,000 combat-ready troops on Ukraine’s border.

The risks to the euro zone’s economy are shining a new light on the European Central Bank’s meeting, previously considered to be of little importance for financial markets with the bank having signalled it would remain on hold for a while.

ECB President Mario Draghi has said he wants to see the impact of June’s rate cuts and September’s offering of cheap long-term loans to banks before making other moves.

But lower-than-expected inflation readings and data on Wednesday showing Italy unexpectedly slipped into recession in the second quarter might prompt him to show more urgency in his post-meeting news conference, some analysts said.

Ten-year Bund yields were 1 basis point lower at 1.096 percent, having fallen to a record low of 1.079 percent earlier in the day. Two-year yields hit their lowest in over a year at minus 0.001 percent.

“We’ve opened with a risk-off tone, mainly a reaction to what’s going on with Ukraine and Russia. People are focusing on the economic impact of the retaliatory sanctions,” said Lyn Graham-Taylor, rate strategist at Rabobank.

“The ECB are not going to change policy at this meeting because of that, for sure. But it will be interesting to see how he (Draghi) deals with it.”

Adding to worries about the recovery, data showed German industrial output rose just 0.3 percent on the month in June, missing a forecast rise of 1.3 percent.

SPANISH AUCTION

Lower-rated euro zone bonds suffered at the open but recovered after a strong Spanish auction. Spanish and Italian 10-year yields fell 3 basis points to 2.56 percent and 2.78 percent, respectively.

Madrid sold 3.1 billion euros of six- and 10-year bonds, more than targeted, drawing strong demand. Traders said some investors had used the auction as an opportunity to replace some of their Italian bonds with Spanish ones following Wednesday’s disappointing growth data.

Other analysts were less worried about Italy.

“While the recent slowing down in growth momentum for Italy needs to be monitored, we continue to see ECB monetary policy as an important factor that should keep credit spread compression going,” said Luca Cazzulani, rate strategist at UniCredit.

Spain has performed above expectations so far this year and is expected to grow about 1.5 percent in 2014.

Sandra Holdsworth, investment manager at Kames Capital, remained cautious on peripheral debt.

“For peripheral countries, a slowdown in the pace of the European recovery from these levels can create problems, ” said Holdsworth, whose group manages assets worth about $63 billion. (Reporting by Marius Zaharia; Editing by Catherine Evans)

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