LONDON (Reuters) - German Bund yields fell to their lowest in eight months on Friday as tensions over Russia and the West over Ukraine and concerns over Chinese growth buoyed demand for low-risk assets.
The low in 10-year yields just above 1.50 percent was touched on the back of jitters created by Russia launching new military exercises near its border with Ukraine on Thursday and showing no sign of backing down on plans to annex Crimea, despite the threat of Western sanctions. German Chancellor Angela Merkel has warned of “catastrophe” unless Russia changes course.
Later in the day yields retreated somewhat as Russian Foreign Minister Sergei Lavrov said his country had no plans to invade south-eastern Ukraine. U.S. President Barack Obama said he still hopes for a diplomatic solution.
Bund yields were last flat on the day at 1.55 percent, but still posted their biggest weekly decline since September 2013.
“We’re still at safe haven-supported levels,” said David Schnautz, rate strategist at Commerzbank in New York. “It is still a very hard to grasp situation.”
Data showing China’s economy slowed markedly in the first two months of the year also fuelled flows into German Bunds.
Expectations that final euro zone inflation numbers for February due on Monday could be revised lower, after downwards revisions in data from Italy and Portugal, revived bets that the European Central Bank may further ease policy later this year.
Flash euro zone annual inflation for February was estimated at just 0.8 percent, slightly above analysts’ predictions but still way short of the ECB’s target of close to 2 percent. Money market rates have fallen this week after ECB policymakers stressed the bank was ready to act if needed.
President Mario Draghi struck a more dovish tone on Thursday, saying the ECB has been preparing additional policy steps to guard against deflation taking hold in the region as a strong euro weighs on prices.
Yields on junk-rated Greek and Portuguese bonds, which are more exposed to sell-offs in emerging markets as they are held by the same investors, reversed some of their recent falls.
Greek 10-year yields were 6 bps higher on the day at 7.33 percent while 30-year yields were 5 bps up at 7.08 percent.
Yields on 10-year bonds have risen further above longer-dated ones this week, after briefly falling below last week, dousing expectations the curve was returning to a more normal upward slope on waning default risks.
Fresh delays in talks between Athens and its international lenders to finalise its bailout review and release its next aid tranche brought back to the forefront of investors’ minds concerns they might not get all their money back.
“It remains the case that Greek debt is unsustainable,” said Gianluca Ziglio, an analyst at Sunrise Stockbrokers.
Elsewhere, Italian and Spanish 10-year yields slipped to trade near eight-year lows at 3.41 percent and 3.34 percent respectively.
Most peripheral euro zone bonds, except Greek and Portuguese debt, have so far been resilient to the growing geopolitical tensions, thanks to easing investor concerns about the debt crisis.
Editing by Mark Trevelyan