November 20, 2019 / 8:09 AM / 15 days ago

German Bund yields fall to 2-1/2 week low on Trump trade warning

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

By Dhara Ranasinghe

LONDON, Nov 20 (Reuters) - Germany’s 10-year government bond yield fell to its lowest level in about 2-1/2 weeks on Wednesday after U.S. President Donald Trump said the United States would raise tariffs on Chinese imports if no trade deal is reached with Beijing.

Trump’s comments on Tuesday set the tone for world markets, with U.S. Treasury yields also falling while stock markets weakened.

Euro zone bond markets have been largely range-bound this week as investors wait for fresh cues, but latest trade headlines and news that the U.S. Senate has passed legislation aimed at protecting human rights in Hong Kong stoked fresh buying of safe-haven debt.

Across higher-rated debt markets 10-year bond yields were around 2 basis points (bps) lower in early trade

In Germany, the bloc’s benchmark bond issuer, 10-year bond yields fell to as low as -0.356% — down 14 bps from five-month highs hit earlier this month.

U.S. 10-year Treasury yields also fell to a 2-1/2 week low around 1.74%.

“It’s all about sentiment on trade, even the Phase 1 deal is at risk of being delayed so we have this classical risk-off trade taking place again,” said Commerzbank rates strategist Rainer Guntermann.

“Equities are lower and safe-havens such as Treasuries and Bunds are in demand.”

Southern European bond yields were largely steady but remained vulnerable to a shift in sentiment towards risk assets, analysts said.

Italian bond yields, in particular, rose sharply late on Tuesday as stock markets weakened.

In recent weeks peripheral bonds have parted ways with higher-rated issuers such as Germany and France, bearing the brunt of profit-taking in bond markets.

There was some focus on a 30-year German bond auction later this session, which analysts expected to go smoothly because it is the final 30-year bond sale of the year and yields have risen in recent weeks.

A sell-off in bond markets over the past two months has pushed 30-year German bond yields back above 0%, though the rest of the curve remains in negative yield territory.

Elsewhere, the European Central Bank’s chief economist, Philip Lane, said the euro zone economy will not fall into a recession, though it is growing less than expected. (Reporting by Dhara Ranasinghe Editing by David Goodman )

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