November 15, 2017 / 11:27 AM / a month ago

UPDATE 2-Euro's bounce, risk-off mood puts bonds on firmer ground

* Bond yields broadly lower

* Euro strength, “risk-off” lifts demand for bonds

* Germany sells 10-year debt

* U.S. yield curve flattens further

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds Greek exchange details, updates prices)

By Dhara Ranasinghe

LONDON, Nov 15 (Reuters) - Borrowing costs in the euro area fell on Wednesday as the single currency rallied to its highest levels in over three weeks and equities tumbled, allowing regional debt markets to recover some ground after a heavy sell-off in the past week.

Boosted by strong German economic growth data on Tuesday, the euro rose to 1.1853 against the dollar at one stage - its highest level since Oct. 20.

Currency strength, which puts downward pressure on inflation, usually bodes well for the bond market.

A market gauge of long-term euro zone inflation expectations pulled back from eight-month highs hit on Tuesday at around 1.70 percent.

“Core bond markets are on a stronger footing and the euro is certainly helping,” said Commerzbank rates strategist Rainer Guntermann.

In addition, a fall in U.S. Treasury yields and weaker stock markets lifted demand for safe-haven bonds, such as Germany‘s. World stocks were set for their longest losing streak in more than six months, pulled down by weaker commodities.

The combination put bond markets on firmer ground even as markets absorbed fresh bond supply. Germany, the euro zone’s benchmark bond issuer, sold around 2.5 billion euros of 10-year bonds.

German 10-year bond yields fell 4 basis points to 0.36 percent, their lowest level in almost a week, before settling at 0.38 percent.

Thirty-year German bond yields were down a similar amount to 1.20 percent.

Across the euro area, 10-year bond yields were down 1 to 3 bps. “The fall in yields is reflective of the risk-off mood in equities and commodity markets,” said Martin van Vliet, senior rates strategist at ING.

Bond markets had come under heavy selling pressure from a large sale of German bond futures last week, exacerbated by heavy bond supply this week. Investors often push bond prices down, and yields up, to make way for new bonds.

U.S. Treasury two-year note yields touched a nine-year high on Tuesday. Those on long-dated debt fell as the yield curve flattened for a second straight day and investors braced for another Federal Reserve interest-rate rise in December.

Inflation data from the world’s largest economy showed prices barely rose in October as the boost to gasoline prices from hurricane-related disruptions to Gulf Coast oil refineries were unwound. But rising rents and healthcare costs pointed to a gradual buildup of underlying inflation.

Chicago Federal Reserve Bank President Charles Evans said on Wednesday he was worried about a drop in U.S. inflation expectations, and called for the U.S. central bank to respond by flagging the likelihood of higher inflation ahead.

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 Dhara Ranasinghe; Editing by Mark Heinrich

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