August 17, 2018 / 7:47 AM / a month ago

Euro zone bond yields fall but Bund indicates ongoing risk aversion

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

By Virginia Furness

Aug 17 (Reuters) - Euro zone bond yields fell on Friday as upcoming talks between China and the U.S. eased concerns about trade, but further sanctions were threatened on Turkey, tempering a return to riskier assets and leaving bund yields pinned to recent lows.

Asian and European stocks gained, with the dollar coming off the 13-1/2 month highs on Friday morning as next week’s talks between China and the United States eased concerns of a global trade war, and helped stem risk aversion in the broader markets.

Turkish bonds and the lira had also found some support on Thursday after Finance Minister Berat Albayrak assured international investors on a conference call that the country would emerge stronger from its currency crisis and that its banks were healthy.

Earlier supportive measures from the Turkish central bank and key ally Qatar have helped the Turkish lira strengthen, although it was little changed after Albayrak’s call.

But threats of further economic sanctions on Turkey from Washington on Thursday caused the lira to weaken to 5.86 against the dollar from its previous close of 5.815, though it then recovered to 5.80.

Peripheral euro zone bonds, particularly in Italy, had been hit by concerns about European bank exposure to Turkey, as well as receding global risk appetite.

With Turkish risk looking to recede, Italian government bond yields found support in early trade on Friday and were 1- 2 basis points lower across the curve. Italy’s 10-year was at 3.10 percent. ,,.

Spanish and Portuguese government bonds were also lower in early trading.,

Italian 10-year yields hit a 2 1/2-month high of 3.20 percent on Wednesday, with the spread over German bonds also the widest since late May at 289 bps.

“We’re seeing some improvement, some stabilisation of risk appetite which implies some demand for BTPS,” said Michael Leister, rates strategist at Commerzbank. “Looking at the spreads, we’re going to see some demand attracted to those extreme levels.”

Despite the improving global backdrop however, investors are reluctant to add risk going into the weekend, meaning that safe haven assets such as Germany’s 10-year government bond yield, the benchmark for the euro zone, remain well bid.

Germany’s 10 year Bund was almost unchanged from Thursday’s close at 0.31 percent, with the rest of the government bond curve also flat.

“Investors are sensitive to the headline risk that might come over the weekend,” said Commerzbank’s Leister.

“We would expect Bund yields to rise given concerns about Turkey and China are receding - we expected a sell-off - but there will be some demand not to be exposed over the weekend.”

Yields on German bonds, considered one of the safest and most liquid assets in the world, had fallen to their lowest level in a month on Wednesday as the currency crisis in Turkey led to a global market selloff and boosted demand for safe assets. (Reporting by Virginia Furness Editing by Andrew Heavens)

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