June 21, 2018 / 7:48 AM / 5 months ago

Euro zone yields hover near lows on market jitters over politics

* Yields hover near lows despite big auctions from France, Spain

* Concern over trade wars lingers as China warns U.S.

* Draghi says “not optimistic” on trade wars

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

By Abhinav Ramnarayan

LONDON, June 21 (Reuters) - Euro zone bond yields hovered near recent lows despite a heavy slate of bond auctions due later on Thursday, with concerns over a global trade conflict keeping investors interested in safe haven assets such as government debt.

Most euro zone government bond yields were unchanged to slightly higher on Thursday, and within touching distance of recent two-week lows, even though Spain and France are set to add up to 14 billion euros of new supply between them.

This is a sign that demand for euro zone government bonds is particularly strong at the moment, and analysts cited the potential for global trade wars and the potential impact on monetary policy as the main reason.

U.S. President Donald Trump has threatened to slap tariffs on China and other countries around the world, sparking threats of retaliation.

China’s commerce ministry on Thursday accused the United States of being “capricious” over bilateral trade issues, and warned that the interests of U.S. workers and farmers ultimately will be hurt by Washington’s penchant for brandishing “big sticks”.

On Wednesday, European Central Bank chief Mario Draghi said at an conference in Sintra, Portugal, that he was not optimistic on the policy impact of a trade dispute.

“The danger of a trade war and the potential it may have to directly impact economic growth could hurt this Goldilocks environment,” said DZ Bank analyst Pascal Segesser, referring to the surge in growth over the past year in developed economies without a corresponding spike in inflation.

As a result, the yield on Germany’s 10-year government bond, the benchmark for the bloc, was only marginally higher at 0.38 percent, and still not too far from the 2-1/2 week low of 0.35 percent hit on Tuesday.

French and Spanish equivalents were also only a shade higher on the day ahead of their respective auctions, and still close to their lowest levels in at least two weeks, also hit on Tuesday.

Later on Thursday, initial estimates on euro zone consumer confidence are due to be released, and the number will be closely watched, particularly with a heavy slate of monetary policy events out of the way.

“After the Sintra conference, with (U.S. Fed Chair) Jerome Powell committing to a gradual rate hike path and Draghi confirming a cautious stance, the focus gets more to the fundamentals,” said Segesser of DZ Bank.

In this context, the consumer confidence data will provide some indication of what direction the euro zone is heading towards.

Recently, many economic indicators in the bloc have fallen short of expectations, one of the factors that has kept high-grade yields pinned lower as investors bet that the monetary policy stance will stay loose for longer.

The Bank of England is due to meet on Thursday, and though no rate hike is expected, market participants will watch for signals of a hike later in the year, possibly as early as August.

Reporting by Abhinav Ramnarayan Editing by Keith Weir

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