September 26, 2017 / 7:33 AM / in 24 days

Euro zone bonds settle as Fed clues mute German blues

* Yields steady after biggest drop in seven-weeks

* Investors shrug of latest Korean war of words

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

By John Geddie

LONDON, Sept 26 (Reuters) - Europe’s benchmark bond yield steadied on Tuesday after its biggest daily drop in seven weeks as investors waited for a Federal Reserve speech that may flesh out plans to tighten U.S. monetary conditions.

The yield on Germany’s 10-year bond, seen as a safe store of cash in times of stress, slid 6 basis points on Monday after an unexpectedly weak election result for Angela Merkel and North Korea accused the United States of having declared war.

When European trading began on Tuesday, Germany’s yield edged up slightly as analysts said a speech from Fed chair Janet Yellen, due at 1645GMT and titled “prospects for growth: reassessing the fundamentals”, swept into focus.

Investors will be parsing her words, and those of other Fed officials due to speak on Tuesday, for clues on whether the U.S. central bank will stick to plans to raise interest rates in December.

“Investors are not fully up to speed with the risk of hawkish signals from Fed officials,” Mizuho strategist Antoine Bouvet said.

“The Fed is back in a situation where it would want to show optimism at the very least, and the market should be pricing in more hikes in the coming months and quarters than it is currently.”

According to CME’s FedWatch tool, money markets point to a 70 percent chance of a hike in December but only a 20 percent chance of a further hike in March 2018.

Analysts said a rise in oil to a 26-month high, which bolsters inflation, and an upcoming sale of two-year German debt should also keep upward pressure on yields.

SHORT-LIVED

Yet again, the market’s reaction to the latest escalation in tension between North Korea and the U.S. proved short-lived.

Yields on U.S. Treasuries and German Bunds fell to a day’s low when North Korean Foreign Minister Ri Yong Ho said on Monday afternoon that Twitter comments from U.S President Donald Trump amounted to a declaration of war.

Both traded back up early on Tuesday in what analysts say reflects a widespread belief that diplomacy will still prevail.

All other euro zone bond yields were a touch higher on Tuesday.

Elsewhere, Emmanuel Macron will push on with plans to detail a major overhaul of the single currency zone, even though a weakened Merkel may not be in a position to help him deliver on it.

Her conservatives were already resistant to some aspects of the French President’s plan, notably an idea to give the euro zone a multi-billion-euro budget of its own, administered by Brussels. Her likely new coalition partners the FDP are even more hostile to that.

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

editing by John Stonestreet

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