June 20, 2018 / 7:26 AM / 6 months ago

German bond yields pull back from 2-1/2 week lows as risk appetite returns

* German Bund yield off 2-1/2 week lows

* World risk appetite pick up

* Draghi, Powell, Kuroda to speak at Sintra forum

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

By Dhara Ranasinghe

LONDON, June 20 (Reuters) - German bond yields pulled away from 2-1/2 week lows on Wednesday as world stock markets put aside trade war fears and rallied, taking the shine off safe-haven bond markets.

An escalation in trade tensions between the United States and China, plus dovish rhetoric from the European Central Bank that has boosted confidence a rate hike remains some way off, have pushed down bond yields in recent days.

But having hit more than two-week lows, yields on 10-year bonds in the single currency bloc were unlikely to fall much further without a fresh driver, analysts said.

That could come later in the day, given that a number of central bankers are slated to speak at the ECB’s central banking forum in Sintra, Portugal.

Federal Reserve Chair Jerome Powell, ECB chief Mario Draghi, Bank of Japan Governor Haruhiko Kuroda and Reserve Bank of Australia Governor Philip Lowe are all scheduled to speak at the conference on Wednesday.

“We have a heavyweight policy panel ... four different banks with four different backgrounds and we’ve already heard from Draghi who has reiterated the need for patience and prudence,” said Commerzbank rates strategist Rainer Guntermann.

“I suspect safe-havens such as Bunds and Treasuries could be put to the test as risk sentiment shows signs of stabilising.”

In early trade, most 10-year bond yields were little changed on the day. Germany’s Bund yield was 0.5 basis points higher at 0.38 percent, above a 2-1/2 week low of 0.35 percent hit on Tuesday.

On Tuesday, Draghi said the ECB will be patient in tightening policy further, adding that market pricings for its first post-crisis rate hike were consistent with its aim to move gradually.

Since the ECB said last week it would end its 2.6 trillion euro stimulus scheme by the end of 2019 but keep rates unchanged at least through next summer, market rate hike expectations have been pushed back by three months to September 2019.

Money market pricing suggests just one 10-basis-point rate hike is fully priced in by investors next year. <ECB WATCH>

There was some outperformance of peripheral bonds after Germany and France on Tuesday agreed to create a budget for the euro zone and hailed a “new chapter” for the currency union.

Italy’s 10-year bond yield was down 2.3 bps at 2.53 percent.

“Yesterday’s joint statement by France and Germany could help to improve sentiment in the euro zone at the margin,” UniCredit said in a note.

“Combined with last week’s dovish ECB tones, this should provide ongoing support to the periphery. The relative lack of details, however, suggest a cautious approach anyway.” (Reporting by Dhara Ranasinghe Editing by Catherine Evans)

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