Germany's borrowing costs have fallen to a record low on an EU decision to impose new sanctions against Russia. While investors flee to the safe haven of German debt, they are selling shares in firms exposed to Russia.
Yields on Germany's benchmark 10-year debt hit a new low Tuesday with investors receiving returns of just 1.119 percent on their capital.
The dip exceeded a previous all-time low on Germany's Bund treasuries of 1.127 percent that was last seen in June 2012.
As trading volumes were extremely low, it did not take much to "get things moving" on the markets, according to Patrick Jacq, a bond strategist at BNP Paribas.
"The geopolitical context is not conducive to risk taking," Jacq told the AFP news agency.
That context on Tuesday was marked by new sanctions imposed by the European Union on Russia over the crisis in Ukraine.
Following months of hesitation, EU diplomats finally agreed on broad economic sanctions. The new measures will shut state-owned Russian banks out of European capital markets and target the defense sector and sensitive technologies, including Russia's crucial energy sector.
The move has caused investors to avoid risk assets, such as stocks, and flock to sovereign debt, like German bonds, that is deemed to be safe in times of financial turmoil.
As a result, European shares lost some of their strong gains in the course of the day on Tuesday, logging smaller increases than initially precipitated by most companies' robust earnings.
Germany's blue-chip stock market index DAX closed 0.6 percent higher, while the EuroStoxx50 index gained as much on a Europe-wide scale.
British oil company BP was among the biggest losers , dropping 2.5 percent despite a surge in second-quarter earnings.
BP owns a minority stake of 20 percent in Russian state-owned oil giant Rosneft and warned Tuesday its business might be hurt by tougher economic sanctions against Moscow.
uhe/chc (Reuters, AFP, dpa)