LONDON: German bond yields dipped back towards record lows on Wednesday with conflicts in Ukraine and the Middle East supporting demand for safe-haven government bonds.
Benign US inflation data on Tuesday, suggesting less pressure for an early rise in interest rates by the Federal Reserve, helped keep bond yields subdued.
The European Union is considering tougher sanctions against Russia over the crisis in Ukraine which escalated after the downing of a Malaysian airliner last week. These could include restricting Russian access to European capital markets, defence and energy technology.
The ongoing conflict in the Gaza strip, where Israeli forces pounded multiple sites and said it was meeting stiff resistance from Hamas Islamists, also kept investor appetite for risk in check.
German 10-year yields were 1.4 basis points lower at 1.16 percent, nudging back towards the record low of 1.126 percent hit at the height of the euro zone debt crisis in mid-2012.
"Investors are quite happy to stay with their Bund positions. In light of the geopolitical tensions that are not yet completely resolved in Ukraine and the Middle East there's not much potential for Bund yields to pop higher any time soon," said Christian Lenk, a strategist at DZ Bank.
Market participants expect some of the hefty bond redemptions and coupon repayments, estimated at over 40 billion euros, due at the end of the month from Spain and Italy to be reinvested in German bonds, keeping yields subdued.
Yields on peripheral euro zone bonds were flat to a touch up.
MONEY MARKETS
Yields on shorter-dated core euro zone bonds were also a toucher lower as money markets showed little sign of strain from an expected drop in spare cash in the euro zone banking system as banks repay a bumper 21 billion euros in emergency loans to the European Central Bank.
Some market strategists expect excess liquidity to fall below 100 billion euros for the first time since May following the repayment and after banks took a lower-than-forecast amount of one-week loans from the ECB.
Others said short-term bond yields and money market rates were likely to remain subdued as excess liquidity was set to get
a boost in September when the ECB offers banks a fresh round of cheap four-year loans.
"The fact that there's a possibility for a huge rise in liquidity in September will cap any upward pressure in Eonia and short-term rates driven by a fall in excess liquidity," said Alessandro Giansanti, a strategist at ING.
The euro overnight interbank lending rate edged down to 0.04 percent on Tuesday from 0.048 percent on Monday, staying near the upper end of the 2 to 5 basis point range it has traded in during the last month.
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