December 17, 2014 / 12:21 PM / 3 years ago

German yields pinned near record lows as Russia, Greek vote eyed

* Bund yields pinned just below 0.60 percent

* Market inflation gauge falls to new low below 1.60 pct

* Greek yields edge up before 1st round of presidential vote (Updates with fall in inflation expectations, analyst comments)

By Emelia Sithole-Matarise

LONDON, Dec 17 (Reuters) - Investor nervousness over Russia’s financial crisis and an upcoming presidential vote in Greece kept German Bund yields pinned near record lows on Wednesday.

A slide in one of the European Central Bank’s favoured market measures of inflation expectations to a new low compounded pressure on the bank to announce more stimulus measures in January, keeping most euro zone debt yields subdued near historic troughs.

Demand for assets perceived as safe accelerated on Tuesday as Russian financial markets collapsed after an aggressive rate hike by the central bank failed to buttress the battered rouble.

Focus was also on Greece, which holds the first of three rounds of a presidential vote later in the day that will determine whether the country is forced into snap elections and a new period of political chaos.

The flight to quality, however, lost a bit of steam as uncertainty on the outcome of the U.S. Federal Reserve’s final policy statement of 2014 made investors cautious. Analysts expect it to remove language pledging to wait a “considerable time” before hiking interest rates in 2015.

“There are a number of event risks ahead of us -- the FOMC decision and the Greek presidential vote, and investors remain nervous over events in Russia. So core government bonds continue to benefit,” said Nick Stamenkovic, a strategist at RIA Capital Markets.

German 10-year yields, which set the standard for euro zone borrowing costs, were 1 basis point down at 0.59 percent, having fallen as low as 0.566 percent on Tuesday.

With the ECB expected to signal in January the expansion of its asset purchases to include government bonds, analysts expect the yields to fall as low as 0.50 percent in the coming month.

A further fall in market inflation expectations on the back of a steep drop in oil prices reinforced those bets.

The five-year five-year breakeven forward -- which shows where five-year inflation will be in five years’ time -- hit 1.5977 percent, well below the ECB’s target inflation rate of just below 2 percent. The two-year inflation swap rate, as quoted by ICAP, turned negative late yesterday.

“The whole universe of market-based inflation measures is collapsing and printing new lows which makes QE more likely and so ... overall the European fixed income markets apart from Greece seem very well supported even at these low (yield) levels,” said Commerzbank strategist Michael Leister.

Greek 10-year yields were 2 bps up at 9.16 percent ahead of Wednesday’s vote, still below the 11 percent yielded by three-year paper -- a sign of investor fears of a near-term default.

Analysts see the decision to bring forward the presidential election as a risky gambit that Prime Minister Antonis Samaras hopes will provide a fresh mandate for his government, but which could easily plunge the country into renewed political turmoil. (Editing by Crispian Balmer)

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