August 7, 2014 / 7:26 AM / 3 years ago

German Bund yields hit record low on West-Russia tensions

* 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

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, giving 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 wanted to see the impact of June’s rate cuts and September’s offerings of cheap long-term loans to banks before making other moves.

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

Ten-year Bund yields fell 2 basis points to as low as 1.086 percent - a new record low. Bund futures rose 30 ticks to 149.12. Two-year yields hit their lowest in over a year dipping into negative territory to trade 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.”

Lower-rated euro zone bonds suffered, with Spanish and Italian 10-year yields up 2 basis points at 2.60 percent and 2.82 percent, respectively.

Spain is aiming to sell between 2 billion and 3 billion euros in six and 10-year bonds later in the day.

Analysts say the small size will ensure a smooth sale, with some investors likely to use the auction as an opportunity to replace Italian bonds with Spanish ones, following the disappointing gross domestic data on Wednesday.

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

“With the gap widening between Spain and Italy in terms of real economy performance, this supply could see further switching out of Italy into Spain,” Peter Chatwell, rate strategist at Credit Agricole, said in a note. (Reporting by Marius Zaharia; Editing by Toby Chopra)

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