September 15, 2017 / 7:57 AM / in a month

Euro zone bond sell-off grinds to a halt as North Korea "spoils the party"

* Yields edge lower as investors buy up safe haven govt bonds

* Geopolitical tensions likely to keep yields pinned for months

* Economists expect ECB to announce tapering in October

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

By Abhinav Ramnarayan

LONDON, Sept 15 (Reuters) - Euro zone government bond yields edged off the week’s highs on Friday as geopolitical tensions drove investors back into a market they have been leaving all week.

A glut of supply and growing expectations of tighter monetary policy in Europe and the United States had pushed investors away from government bonds up to Thursday, and yields -- which move inversely to prices -- had risen sharply.

But another missile test from North Korea on Thursday night made many retreat back into safe-haven assets such as government bonds.

North Korea fired a missile that flew over Japan’s northern Hokkaido far out into the Pacific Ocean on Friday, South Korean and Japanese officials said, deepening tensions after Pyongyang’s recent test of its most powerful nuclear bomb.

Germany’s 10-year government bond yield, the benchmark for the region, was on Thursday set for its biggest weekly rise since late June, having risen 13 basis points to hit a high of 0.43 percent. But by Friday morning, they had edged back down to 0.41 percent.

Other euro zone bond yields were flat to a basis point lower and about 1-2 basis points off Thursday’s highs.

“North Korea is spoiling the party in markets,” said DZ Bank analyst Rene Albrecht. “I think we will see a continuation of provocations from North Korea and we have to get used to geopolitical risks bubbling over the next few months.”

Markets were in “risk on” mode up to Thursday, selling bonds and buying equities, he said.

He also attributed the bond market sell-off preceding the missile test to expectations that the European Central Bank will announce a start to tapering of its asset purchase programme when it meets next month.

A Reuters poll of economists showed they expect the central bank to announce in October that it will extend its asset purchase programme by six months but cut how much it buys each month to 40 billion euros from January.

Expectations around U.S. Federal Reserve action has also ramped up after Thursday’s stronger-than-forecast increase in consumer prices in the world’s largest economy.

“The market will be watching the Fed next week very closely, first because of balance sheet reduction and as well because the market is now pricing a higher probability of a rate hike in December,” said Albrecht.

A spate of supply had also helped push yields higher: Ireland, Italy, Austria, Germany and the Netherlands have between them sold over 20 billion euros of bonds over the past week.

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 Catherine Evans

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