July 2, 2018 / 7:21 AM / 9 months ago

German bond yields dip to five-week lows as investors seek safety

* Germany’s bond yield at almost five-week lows

* German two-to-10-year yield gap tightest in a year

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

By Dhara Ranasinghe

LONDON, July 2 (Reuters) - German 10-year bond yields dipped to five-week lows on Monday, pushed down by political uncertainty in Germany, trade war fears and an expectation that the ECB could buy more long-dated bonds from next year to keep euro zone borrowing costs in check.

German Interior Minister Horst Seehofer offered his resignation to party colleagues late on Sunday, party officials said, escalating a row over migration with Chancellor Angela Merkel that threatens her fragile government.

Political uncertainty in Europe’s biggest economy alongside escalating global trade tensions ensured a firm start to the second half of the year for German bonds, which are considered one of the safest assets in the world.

The yield on Germany’s benchmark 10-year Bund yield fell to 0.289 percent, its lowest level in almost five weeks and pushing it towards more than one-year lows hit at the peak of a selloff in Italian bonds in late May.

That pushed the gap between short-dated and long-dated German bond yields to around 98 basis points — the tightest in a year.

“We are in environment driven by increased uncertainty, whether that’s trade wars or European politics or Italy,” said Christian Lenk, a rates strategist at DZ Bank.

“That adds to the picture that investors are happy to own safer assets over the summer months.”

While German bond yields fell, yields on most other 10-year government bonds in the euro area were flat to slightly higher on the day.

On Friday, Reuters reported that the European Central Bank is considering buying more long-dated bonds from next year to keep euro zone borrowing costs in check even after it stops pumping fresh money into the economy, according to sources.

The move would be reminiscent of the U.S. Federal Reserve’s Operation Twist of 1961 and 2011, which saw it replace short-dated paper with longer-term debt to lower market interest rates and boost an ailing economy.

Analysts said the report was also supporting demand for long-dated German bonds, although any further flattening in the German bond yield curve was likely to be limited.

Reporting by Dhara Ranasinghe Editing by Catherine Evans

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