May 21, 2019 / 7:04 AM / a month ago

Euro zone bonds pause after stellar rally, first Dutch green bond in focus

* German Bund yield holds above 2-1/2 year low

* Netherlands to issue first green bond

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

By Dhara Ranasinghe

LONDON, May 21 (Reuters) - Government bond yields in much of the euro zone steadied above recent multi-year lows on Tuesday, with investors still reluctant to sell fixed income given heightened concern about economic growth and trade tensions.

There was some focus on the Netherlands, which launches its first green bond later this session. The new 20-year bond will also be the first green issue from a triple-A rated sovereign.

Bond issues in general from the single currency bloc have seen strong demand this year given a backdrop of weak economic growth and expectations that the European Central Bank will maintain an ultra-easy monetary policy stance for some time.

After sharp yield falls last week, sparked by renewed U.S./China trade tensions and Brexit uncertainty, bond markets have stabilised in recent sessions.

However, a perception that central banks will have to take further action to shore up growth, concern that global trade tensions may become protracted and upcoming European parliament elections meant any rise in yields was limited for now.

“The market was caught by surprise last week by the sudden deterioration in the U.S./China trade talks and as things stand there is reason to feel pessimistic,” said John Davies, G10 rates strategist at Standard Chartered Bank in London.

“So now we are in a bit of wait-and-see territory here, with political risk this week quite big.”

Germany’s benchmark 10-year government bond yield was up just 1 basis point on the day at minus 0.08%, off 2-1/2 year lows but still down almost 10 bps this month.

French and Dutch 10-year bond yields have also nudged up from last week’s 2-1/2 year lows but remain well below levels they started this year at .

Focus turned to the Dutch green bond auction, which has a target volume of 4-6 billion euros.

The Netherlands follows Poland, France, Belgium and Ireland as sovereigns that have issued green bonds in recent years.

Although green bonds make up a small fraction of the overall bond market, global interest has soared as banks, sovereigns and companies look to tap into increasing investor appetite for the product.

“It shows that issuers and investors are increasingly interested in the broad ESG (environmental, social, governance)universe and it’s just going to grow from here,” said Ross Hutchison, a bond fund manager, at Aberdeen Standard Investments in Edinburgh, referring to the Dutch green bond sale.

Reporting by Dhara Ranasinghe Editing by Andrew Heavens

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