November 7, 2018 / 8:32 AM / 9 months ago

Euro zone bond yields dip as safe havens gain from U.S. post-election uncertainty

* Democrats seize U.S. House control in midterm elections

* Treasury yields fall, dollar weakens

* Euro zone bond yields dip, Germany to auction Bunds

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, Nov 7 (Reuters) - Euro zone government bond yields edged down on Wednesday, tracking a fall in U.S. peers after Democrats won control of the U.S. House of Representatives in midterm elections, boosting the party’s ability to block President Donald Trump’s agenda.

The Republicans expanded their majority in the U.S. Senate but lost the House in a setback for Trump.

While both outcomes were broadly in line with market expectations, the prospect of political gridlock creates some uncertainty for investors - weighing on the dollar and lifting demand for safe-haven bonds.

In Europe, benchmark 10-year bond yields were down 1-4 basis points in early trade.

German 10-year bond yields fell 1.5 bps to 0.42 percent , holding above seven-week lows hit last month at around 0.34 percent.

U.S. Treasury yields fell after the election results, with 10-year U.S. bond yields last down 3.5 bps at 3.18 percent .

“The overall result was largely expected but the Republican gains in the upper chamber taint the Democrats’ win and will make it harder for them to win the Senate in two years,” said Peter Chatwell, head of rates strategy at Mizuho in London.

“This should mean that Trump’s run for a second term in 2020 remains on track, with his populist rhetoric set to continue setting the tone in the U.S. and beyond at least until then.”

Analysts said the overall bond market impact from the elections was also moderated as the results were unlikely to impact the outlook for further rate increases from the Federal Reserve or change Trump’s trade dispute with China.

“We would argue that if Trump can do less on the domestic front, he is more likely to focus on external matters such as trade, which will impact risk sentiment,” said Patrick O’Donnell, investment manager at Aberdeen Asset Management.

Heavy longer-dated U.S. Treasury supply this week was also seen limiting the fall in bond yields, while European markets braced for new supply from Germany.

Germany, Europe’s benchmark bond issuer, will auction 3 billion euros ($3.4 billion) of 10-year bonds later this session.

Elsewhere, Italian bond yields fell 3-4 bps across the curve , with a firm open on European stock markets lifting sentiment towards the euro zone’s riskier debt markets. ($1 = 0.8724 euros)

Reporting by Dhara Ranasinghe; Editing by Dale Hudson

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