January 3, 2020 / 8:16 AM / 24 days ago

Euro zone bond yields down as geopolitical tensions unnerve markets

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

By Dhara Ranasinghe

LONDON, Jan 3 (Reuters) - Germany’s benchmark 10-year bond yield fell to a two-week low on Friday from seven-month highs after U.S. air strikes killed a top Iranian commander, heightening geopolitical tensions.

World stocks slipped, oil prices soared and safe-haven assets such as the Swiss franc and U.S. Treasuries rallied as the U.S. air strike in Iraq unnerved investors.

“Markets still remain quite thin after the holidays, but even in a regular session we would have seen a similar reaction,” said Christian Lenk, a rates strategist at DZ Bank in Frankfurt. “The repercussions from the air strike are not clearly forecastable and tensions remain high in the region.”

Yields on German bonds, regarded as one of the safest assets in the world, were sharply lower across the curve.

The 10-year Bund yield fell 5 basis points to a two-week low of -0.248%, 12 bps below seven-month highs hit just a day ago.

Across the euro zone, 10-year bond yields fell 4 to 6 bps . U.S. 10-year Treasury yields hit their lowest in three weeks at around 1.82%.

The focus on geopolitics meant markets paid little attention to stronger-than-expected inflation data from France. French inflation rose 1.6% year-on-year in December, data showed, against analyst expectations for a 1.4% rise.

Preliminary December inflation data from Germany, the euro zone’s biggest economy, are also due this session.

Signs of economic indicators are bottoming out and U.S./China trade tensions are easing have boosted hopes for growth and inflation in the euro zone.

Elsewhere, Spanish bonds showed little reaction to news that a Catalan separatist party plans to abstain during parliament’s upcoming vote to confirm Socialist leader Pedro Sanchez as prime minister.

The move could end a prolonged political deadlock that left Spain without a proper government for most of 2019.

Spain’s 10-year bond yield was down 3.5 bps at 0.41% , in line with southern European peers. (Reporting by Dhara Ranasinghe, editing by Larry King)

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