Safe-haven bonds in the euro area jumped on Wednesday after Russian President Vladimir Putin announced a partial military mobilisation and accused the West of engaging in “nuclear blackmail” against Russia.
The German 10-year yield dropped 9 basis points to 1.856%, after hitting its highest since January 2014 on Tuesday.
The two-year German bond yield was last down 6.5 basis points on the day at 1.657%, but remained close to Tuesday’s 11-year high of 1.749%.
In a speech announcing a partial mobilisation for the country’s military campaign in Ukraine, Putin said Russia had “lots of weapons to reply” to what he called Western threats and that he was not bluffing.
“The escalation of the situation in Ukraine is definitely affecting risk appetite and bond yields are falling this morning because of this,” said Jussi Hiljanen, chief rates strategist at SEB.
“It might be time for a breather and this geopolitical tension adds to the correction potential, at least temporarily, for lower yields.”
Euro zone government bond yields have surged in recent weeks as elevated inflation readings have fuelled expectations for more aggressive monetary policy tightening and higher-for-longer interest rates.
The U.S. Federal Reserve will conclude its two-day policy meeting later in the day where it is expected to raise interest rates by at least 75 basis points.
Traders are fully pricing in a 75-basis-point hike, with just under a 20% chance of a larger full-point increase, according to Refinitiv data.
“The market is concerned about escalation of the conflict, although it is hard to gauge how much of these threats are a near-term concern,” said Antoine Bouvet, senior rates strategist at ING.
“I expect appetite to hold bonds is still pretty limited into the FOMC given their hawkish track record.”
Meanwhile, the European Central Bank’s two most senior policy-setting officials have affirmed their commitment to bring inflation back down towards their target.
Late on Tuesday, European Central Bank President Christine Lagarde said the central bank may need to raise interest rates to a level that restricts economic growth in order to cool demand and combat unacceptably high inflation.
Vice President Luis de Guindos said on Wednesday inflation remains too high and the central bank is “determined” to bring inflation back down to its target.
On the supply front, Austria has started the sale of a new four-year bond at a syndication, according to a lead manager memo seen by Reuters.
