August 12, 2014 / 11:21 AM / 3 years ago

Euro zone yields dip as German data adds to growth concerns

* German investor morale at lowest since Dec. 2012
    * German 10-year yields not far from record lows
    * Italian, Spanish yields also fall

 (Updates with German sentiment data, fresh comments)
    By Emelia Sithole-Matarise
    LONDON, Aug 12 (Reuters) - Euro zone bond yields pushed
lower on Tuesday after a slump in German investor morale added
to concerns about the region's economic recovery, bolstering
bets for further policy easing by the European Central Bank.
    The ZEW index showed German analyst and investor morale fell
to its lowest in more than 1-1/2 years in August, as Europe's
largest economy was hit by fallout from the Ukraine crisis.
    The survey was the latest snapshot of the impact on the
region of economic sanctions between Russia and the West over
the Ukraine, which analysts say will hurt an already feeble and
uneven euro zone recovery.
    The ECB held fire at its policy meeting last week, but its
President Mario Draghi cited the tensions between Russia and the
West as a threat to growth in the currency bloc, leaving the
door open for further supportive action.
    "As far as markets are concerned there's been a relapse in
economic performance in the euro zone," said Orlando Green, an
interest rate strategist at Credit Agricole.
    "Given that the ECB still has potentially more... in its
toolbox, the market is also seeing that as a sign to keep the
bond market elevated because the ECB could do more in terms of
loosening monetary policy."
    Italian and Spanish 10-year bond yields were 3-5 basis
points down at 2.76 percent and 2.50 percent
 respectively. Peripheral euro zone bonds have been
the main beneficiaries of the ECB's policy easing which has
driven their yields to historic lows.
    A flight to quality that had pushed Bund yields to all-time
lows last week began losing some of its steam after Russia
stopped military drills on its eastern border with Ukraine. But
tension began to build again with a Russian plan to send an aid
convoy into eastern Ukraine, supporting
underlying demand for assets seen as safe havens. 
    German Bund yields, the benchmark for euro
zone borrowing costs, were a touch lower at 1.06 percent, not
far from a record low of 1.024 percent reached last week. 
    Some in the market expect Bund yields to fall further to a
low of 1 percent if the slowdown in euro zone growth is
confirmed and if the ECB continues its wait-and-see stance on
further policy easing.
    "Bunds are not expensive at 1 percent if growth momentum is
slowing, whilst the ECB continues to make a policy error of
timidity (on further cuts to its main interest rate).... Both
conditions need to be reversed for us to sell Bunds and neither
seems likely in 2014," RBS strategists said in a note.

 (Editing by Larry King and John Stonestreet)

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