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German Bund yields fall as Russian trucks enter Ukraine
August 22, 2014 / 11:11 AM / 3 years ago

German Bund yields fall as Russian trucks enter Ukraine

* Fed, ECB seen dovish but no promises expected

* Bund yields below 1 pct, other EZ yields also at historic lows

* Ukraine: Russian aid convoy crosses border without permission

By Marius Zaharia

LONDON, Aug 22 (Reuters) - German Bund yields fell close to their record lows below 1 percent on Friday, after Ukrainian authorities said 90 trucks from a Russian aid convoy had crossed the border without permission.

The latest development in the Ukraine crisis that has seen Russia and the West imposing economically damaging sanctions on each other prompted investors to seek refuge in top-rated assets. Ukraine said will not use any force against the Russian convoy, as it wishes to avoid provocations.

Also keeping Bund yields subdued was widespread expectation that central bankers gathering for an annual conference in Jackson Hole, Wyoming, would signal they are in no rush to either tighten or loosen monetary policy.

Federal Reserve chief Janet Yellen is likely to reiterate a view expressed last month that there is significant under-utilisation of labour resources. Those comments prompted markets to push back the timing of an interest rate hike.

“Our guess is that we won’t get any particularly dramatic insight from Yellen. Her views on the labour market are well entrenched,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

German 10-year Bund yields were down 2.4 basis points lower at 0.969 percent, within touching distance of a record low of 0.952 percent.

European Central Bank President Mario Draghi is under pressure to use his last remaining tool -- printing money -- to tackle near-zero inflation and lift a stagnating economy, but he is not expected to show any urgency in that regard.

The ECB cut all its interest rates in June and will offer up to 1 trillion euros of cheap four-year loans to banks (TLTROs)from September. Draghi has said he wants to see the results of these measures before taking new steps.

“Slow growth ahead ... will keep hopes up that the ECB will start a full-scale QE programme,” said Suvi Kosonen, an analyst at Nordea, referring to quantitative easing, the technical term for central bank asset purchases.

“Draghi will most likely stay dovish, but we expect no promises of new measures at this point with the TLTROs still about to materialise. So no ‘whatever it takes’ 2.0 coming up today.”

FLIPPING FRESH COINS

Other euro zone yields also held relatively steady around historic lows. Spanish and Italian yields were flat at 2.39 percent and 2.58 percent respectively.

Such low borrowing costs for countries which have a combined debt of 3 trillion euros, are struggling to grow and have no inflation raise questions about the sustainability of a two-year-old rally sparked by Draghi’s promise in 2012 to do ‘whatever it takes’ to save the euro.

Some observers such as the Bank for International Settlements, which is known as the central bank of central banks, see the rally as a potential bubble which might burst once money gets more expensive, especially in the United States.

But a weak correlation between Spanish and Italian yields with their U.S. counterparts is reassuring.

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The ECB’s stance also helps the euro zone bond market to decouple from the one across the Atlantic.

“In essence, growth and inflation surprises would help sovereign credit risk through supporting debt sustainability, while the absence of growth and inflation will spur further ECB accommodation,” Societe Generale rate strategist Ciaran O‘Hagan said in a note.

“So heads, prices rise and tails, yields fall.” (Reporting by Marius Zaharia; Graphic by Monica Ulmanu; Editing by Toby Chopra)

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