German bonds plunge amid Ukraine crisis fears

(PARIS) - German borrowing costs fell to a record low on Tuesday as investors flocked to the perceived safe haven of bonds amid concerns over rising tensions between the EU and Russia.

The yield on 10-year German debt hit a low of 1.119 percent in the morning, below the previous record set in June 2012 of 1.127 percent.

"The geopolitical context is not conducive to risk taking," said Patrick Jacq, a bond strategist at BNP Paribas, adding that "trade volumes are extremely low, so it only takes a little to get things moving".

Brussels on Tuesday agreed broad sanctions against Russia in the latest step of the showdown between Moscow and the West over the Ukraine crisis that has sent investors fleeing for safe havens.

Borrowing costs for European countries have also fallen since the European Central Bank brought in unprecedented measures in June to help boost weak inflation in the bloc.

Jasper Lawler, a market analyst at CMC Markets, said investors had "brushed aside" Europe's weak economic growth and high unemployment in the hope that the ECB will once again pump more liquidity into markets to stave off deflation.

Interest on Spanish and Italian debt hit fresh lows on Tuesday as investor concerns about the eurozone's former laggards eased.

Spanish 10-year paper dropped to 2.463 percent, down from the previous record set on Monday, while Italy too sank further to 2.634 percent.

Jacq said that bond yields are likely to remain low amid ongoing concern about deflation in the eurozone, which prompted the ECB to take one of its rates into negative territory for the first time last month.

"The inflationary situation is not conducive to a rise in interest rates" he said, adding that investors are waiting for fresh data tomorrow, "with the risk of further deflationary pressures".