August 2, 2018 / 7:47 AM / 14 days ago

Euro zone bond yields dip on trade tensions; BoE in focus

* Euro zone bond yields down 1-2 bps

* Bund yields pull back from 7-week highs

* Trade war jitters support safe-haven debt

* BoE rate decision awaited, hike priced in

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

By Dhara Ranasinghe

LONDON, Aug 2 (Reuters) - Euro zone government bond yields edged down on Thursday, with borrowing costs in Germany and France pulling back from seven-week highs as escalating U.S.-China trade tensions lifted demand for safe-haven debt.

There was also some relief from Japan, where government bond (JGB) yields edged off 1-1/2 year highs.

On Thursday, the Bank of Japan bought 5-10 year JGBs, helping cap a rise in yields. A jump in yields, triggered by BOJ policy changes earlier this week, had sparked worries that Japanese investors will repatriate funds.

World stocks were deep in the red meanwhile, a day after the U.S. administration increased pressure on China for trade concessions by proposing a higher 25 percent tariff on $200 billion worth of Chinese imports.

Most long-dated bond yields in the euro area were down 1-2 basis points in early trade, while European shares fell 0.5 percent

“A combination of the confirmation that (U.S. President Donald) Trump is considering larger tariffs and the BOJ conducted an unscheduled JGB buying explains the move in bonds,” said Peter Chatwell, head of rates at Mizuho.

In Germany, the bloc’s benchmark issuer, 10-year Bund yields fell 2 basis points to 0.4760 percent, down from Wednesday’s seven-week high at almost 0.50 percent.

Yields on 10-year French bonds, popular among Japanese investors, also pulled back from seven-week highs hit the previous session and were down 1 bp at 0.78 percent.

Spain is scheduled to sell up to 4.5 billion euros of bonds on Thursday, while France auctions long-dated debt. That anticipation of new supply limited the fall in bond yields.

Focus was expected to shift to the Bank of England, which looks set to raise interest rates on Thursday to their highest level since the financial crisis almost a decade ago.

Several economists have challenged the need for a rate hike now, given not only risks from the Brexit process but also the potential dampener on global growth from U.S. tariffs on imports and counter-moves by other countries.

“In our view, hiking today could be a policy mistake,” analysts at UniCredit said in a note.

On Wednesday, the U.S. Federal Reserve kept interest rates unchanged but characterized the economy as strong, keeping it on track to increase borrowing costs in September. (Reporting by Dhara Ranasinghe; editing by John Stonestreet)

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