April 19, 2017 / 8:46 AM / 4 months ago

Politics pushes Germany's long-dated bond yields towards year lows

* German 10/30 govt bond yield spread hits 11-week low

* Auction of German 2044 bonds to test demand for duration

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, April 19 (Reuters) - Long-dated German government bond yields were close to their lowest level of 2017 on Wednesday as investors retreated to safe assets in the face of concerns over geopolitical tensions and the upcoming presidential election in France.

Tensions between the United States and North Korea remain high, with Vice President Mike Pence on Wednesday pledging an "overwhelming response" to any attack.

In Europe, investors are preoccupied with a British snap election in June and Sunday's unpredictable first round vote in France, where two anti-EU candidates - far-leftist Jean-Luc Melenchon and National Front leader Marine Le Pen - both have chances to advance to a May 7 run-off.

This has increased the demand for German bonds, considered one of the safest assets in the world, to such an extent that it appears to have trumped concerns on duration.

"When you look at the political issues we have globally, and within the euro zone with the French elections, to buy long-dated Germany is seen as a safe-haven trade," said DZ Bank analyst Rene Albrecht.

"When you add to that expectations that the ECB doesn't end the QE programme soon, and inflation expectations are lower, all of the arguments speak for being long duration (on German bonds)," he added.

The gap between Germany's 30-year and 10-year government bond yields tightened to 71.8 basis points, its lowest since the beginning of February.

This after the yield on the German 30-year bond hit its lowest level all year late on Tuesday at 0.876 percent. The German 10-year bond yield, the euro zone benchmark, also hit its lowest level since November, tracking a move lower in U.S. Treasury yields.

On Wednesday, high-rated euro zone government bond yields were largely unchanged though France's 10-year government bonds dropped 2 basis points to 0.88 percent.

A further test of demand for long-dated German bonds awaits, with the country's debt agency due to sell 1 billion euros of bonds maturing in 2044 later on Wednesday.

"That will be a test for sure, because the bonds are quite expensive now and yields will almost certainly rise after the French presidential elections," said Albrecht.

The fall in long-dated government bond yields is a reversal of sentiment from earlier this year, when higher inflation and the expectations of reduced stimulus from the European Central Bank led investors to shed long-dated bonds.

In March this year, the yield on the German 30-year bond hit 1.29 percent, its highest in more than a year. Since then, lower-than-expected increases in euro zone consumer prices have compressed inflation expectations.

Inflation in the 19-member currency union fell to 1.5 percent in March from a four-year high of 2.0 percent in February, and well below expectations for 1.8 percent.

The five-year five-year forward breakeven rate, a key gauge of long-term inflation expectations in the bloc, has dropped to 1.58 percent compared to 1.795 percent in January.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Abhinav Ramnarayan; Editing by Mark Trevelyan

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