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GRAPHIC-Safety came with negative yields on euro bond rollercoaster

By Marius Zaharia and Vincent Flasseur

LONDON, June 29 (Reuters) - The only euro zone government bonds that preserved investors' capital in the first half of the year were the short-dated ones that carry negative yields, Thomson Reuters Datastream data showed.

When all debt is taken into account, all euro zone bond markets produced losses in the second quarter. The smallest were in Ireland (Other OTC: IRLD - news) at -3.3 percent, while the biggest were in Belgium at -8.5 percent. http://link.reuters.com/cas94w

That was a big swing from the rally investors rode earlier in the year, anticipating the launch of the European Central Bank's trillion-euro bond-buying stimulus programme. But a rise in inflation expectations in the second quarter, which some analysts say is the result of the ECB's new tool, reversed all of those gains in the long-term bonds.

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The only place where returns were positive, however meagre, were in the short-dated bonds.

Bonds expiring in one to three years offered a 0.1 percent return for the first half of 2015 in Germany and France, a 0.5 percent return in Spain and 0.6 percent return in Italy. The returns are little changed from the end of the first quarter.

Those expiring in 10 to 30 years produced losses of about 4 percent in Germany, Spain and France and 1.4 percent in Italy. At the end of the first quarter, long-dated bonds in these countries offered returns of 8 to 12 percent.

The lower-rated, long-dated bonds were hit also by the increasing risk of Greece leaving the euro zone. http://link.reuters.com/kas94w

Greece has closed its banks and introduced capital controls, pledging to give Greek people a vote on its lenders' demands. Investors see it as a de facto vote on euro membership.

If Greece were to leave the euro zone, it could raise the risk for investors that other heavily-indebted member states might follow suit. But while the probability of that scenario has risen, it is still not the base case in the market.

During the sell-off that started in mid-April, German 10-year Bund yields, which set the standard for euro zone borrowing costs, rose from near zero to above 1 percent.

Given their low coupon, they lost about a tenth of their price, incurring great losses for investors holding what is usually seen as one of the safest assets on the planet.

That was the result of an unusual feature for long-term bonds: the very low coupon. On shorter-dated bonds, a small rise in yields does not depress prices by that much.

Two-year German bond yields are down at -0.20 percent from -0.10 percent at the end of last year. The price rose to 100.37 cents in the euro from 100.19. Ten-year Bund yields last traded 0.83 percent, up from 0.54 percent end-2014. Prices fell to 96.99 cents in the euro from 104.30. (Reporting by Marius Zaharia; Editing by Ruth Pitchford)