August 14, 2014 / 4:10 PM / in 3 years

Growth scare kicks German 10-year yields below 1 pct for first time

* German 10-year yields briefly trade below 1 pct
    * French and Spanish 10-year yields hit record lows
    * German Q2 GDP surprisingly contracts; France stagnates

 (Updates prices)
    By Emelia Sithole-Matarise
    LONDON, Aug 14 (Reuters) - German 10-year bond yields
briefly traded below 1 percent for the first time on Thursday as
the euro zone's economic recovery stalled in the second quarter,
bolstering bets for fresh stimulus from the European Central
    Spanish and French bond yields also plumbed record lows as
the bloc's grim growth outlook, increasing pressure on the ECB
to support an economy bracing for the impact of tit-for-tat
sanctions between the West and Russia.
    A surprise 0.2 percent contraction in economic output in
Germany, the euro zone's growth engine, and a stagnation in
France halted the currency bloc's recovery. Analysts polled by
Reuters had expected the euro zone to eke out a 0.1 percent
quarterly expansion. 
    The data sounded a warning for the coming quarters, when
tough sanctions imposed on Russia in July over its involvement
in the Ukraine crisis start to bite.
    "Disappointing euro area growth and intensifying
disinflation pressures increase the pressure on the ECB for
further action in coming months," said Nick Stamenkovic, a
strategist at RIA Capital Markets in Edinburgh.
    "However, an early move is unlikely as the ECB assesses the
impact of the September four-year LTROs (long-term cheap loans
to banks). But if the economy disappoints in the second half, 
then the pressure on the ECB to start QE (money-printing) in
early 2015 will intensify."
    German 10-year yields, the benchmark for euro zone borrowing
costs, briefly fell to an all-time low of 0.988 percent,
according to traders who contribute to trading platforms on
Tradeweb and Bloomberg. Late in the day, the yield on Tradeweb
 was 1.8 bp down at 1.014 percent.  
    French and Spanish 10-year yields hit record lows of 1.392
percent and 2.367 percent 
    Pressure on the ECB to act is already mounting as inflation
in the euro zone remains subdued. French Finance Minister Michel
Sapin urged the central bank in an op-ed in the French daily Le
Monde to do more to combat the risk of deflation and make the
euro more competitive. 
    With turmoil in the Middle East and Ukraine adding to
economic uncertainty, many in the market expect yields on Bunds,
perceived as a safe haven in times of turmoil, to stay pinned at
ultra-low levels.  
    "The level here, plus or minus, could be sustained for quite
a while ... It will take quite some moves in the market, and
especially on hard data, to give yields a hard push upwards from
here," said Simon Fasdal, head of fixed income trading at Saxo
    A report showing Germany had reduced its roughly 2 trillion
euros of public debt last year for the first time since post-war
records began in 1950 added to a growing view that debt supplies
to the market would be reduced in the coming year. 
    The German federal government has already said it is aiming
to have no new borrowing next year as record tax revenues and
rock-bottom interest rates have reduced the burden of serving
the 1.3 trillion euros of federal debt. 

 (Editing by Kevin Liffey)
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