July 20, 2018 / 7:30 AM / in 5 months

German bond yields fall, Italian market cedes ground

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

By Dhara Ranasinghe

LONDON, July 20 (Reuters) - Most government bond yields in the euro zone inched down on Friday, drawing some support from nagging fears in world markets about escalating trade tensions between major economies.

As trade activity thins over the summer months, analysts say investors are either parking their cash in safe-haven markets such as Germany or taking advantage of the lull in political news to invest in higher-yielding bonds such as Italy.

“Looking at August when everyone is at the beach and there is no high probability of political noise, it’s not a bad time to go long Italian paper,” said DZ Bank rates strategist René Albrecht.

“On the other hand there are trade tensions, so investors are still looking for safe havens and we see that in strong demand especially for Bunds and U.S. Treasuries.”

The European Union is preparing a list of U.S. imports to hit if the United States imposes tariffs on EU cars.

On Friday, bond yields in higher rated euro zone issuers such as Germany, France and the Netherlands fell 1-2 basis points.

Germany’s benchmark Bund yield was at 0.32 percent , heading towards recent six-week lows.

“Demand remains healthy in major rates markets, with investors unwilling to depart from the bonds they hold in the current environment filled with uncertainty,” analysts at UniCredit said in a note.

Italian bond yields meanwhile were 6 to 9 basis points higher across the curve , giving up some of this week’s hefty falls ahead of the weekend.

Reassuring comments from Italian politicians on the euro, the European Central Bank’s promise to keep rates low for some time and a slowdown in bond supply in the weeks ahead have all boosted Italian bonds this week, pushing yields down.

The backdrop has encouraged carry trade, where investors taking advantage of low borrowing costs to invest in a higher-yielding asset - in this case Italian bonds. (Reporting by Dhara Ranasinghe Editing by Alison Williams)

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