August 31, 2017 / 7:49 AM / a year ago

German Bund yields set for biggest one-month fall since February

* German bond yields down about 17 bps this month

* Biggest one-month fall since February

* Korea tensions boost safe-haven flows

* Euro zone flash inflation due

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, Aug 31 (Reuters) - Germany’s benchmark 10-year government bond yield was set to record its biggest monthly fall in six months on Thursday, reflecting increased demand for safe-haven assets on the back of rising geopolitical tensions in August.

Bond yields across the euro area were a touch higher early on Thursday ahead of inflation data that will provide the latest snapshot of price pressures in the bloc before a European Central Bank meeting in a week’s time.

European and U.S. bond markets have been caught this week between a stronger tone to economic data globally, putting upward pressure on yields, and concern about rising tensions with North Korea which have boosted demand for safe-haven debt.

Pyongyang fired a ballistic missile over Japan early on Tuesday.

President Donald Trump on Wednesday said “talking is not the answer” to the tense standoff with North Korea over its nuclear missile development, but his defence chief swiftly asserted that the United States still has diplomatic options.

The flows back into safe-haven euro zone bonds this month came after a sharp selloff in July on concerns about a tapering or scaling back of ECB monetary stimulus.

German government bond yields, the benchmark for borrowing costs in the euro area, are down about 17 basis points this month - the biggest fall since February.

Germany’s 10-year bond yield was up just 1 basis point at 0.37 percent early on Thursday, edging away from two-month lows hit earlier this week at 0.32 percent.

“The re-escalation of Korea tensions has sparked a pretty sharp move down in yields this month,” said Martin van Vliet, senior rates strategist at ING. “But the fall in yields should also be seen as a correction after the sharp move in July.”

Preliminary numbers due later this session are expected to show euro zone inflation rose 1.4 percent in August, up from 1.3 percent last month.

Analysts said a higher-than-expected number is unlikely to surprise markets after data on Wednesday showed German and Spanish consumer prices rose more than expected in August.

While still well below the ECB’s target, the upward trend in euro zone inflation could provide some comfort for policymakers looking to rein in their monetary stimulus.

Their meeting next Thursday is a key event for investors trying to assess just when the central bank is likely to start tapering.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Dhara Ranasinghe; Editing by Hugh Lawson

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