* Top-rated euro zone bond yields dip
* N.Korea nuclear test unsettles world markets
* ECB meets on Thursday
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, Sept 4 (Reuters) - Germany’s benchmark 10-year government bond yield fell back towards recent two-month lows on Monday after the sixth and most powerful North Korean nuclear test a day earlier lifted demand for safe-haven assets globally.
South Korea said on Monday it was preparing fresh military drills with its ally the United States and ramping up its ballistic missile defences in response to the test.
In a week in which a number of central banks including the European Central Bank, the Bank of Canada and Reserve Bank of Australia are due to meet, tensions in North Korea turned investors’ focus away from the monetary policy outlook for now.
“The name of the game of this week would have been the ECB but now we have to take into account North Korea,” said Jean-Francois Robin, head of strategy at Natixis in Paris.
“There is a risk-off mood in world markets with yield curves in core markets flattening.”
Japan’s 10-year government bond yield fell to a 10-month low at minus 0.010 percent, setting the tone for European bond markets.
Ten-year bond yields in Germany — the euro zone’s benchmark bond issuer — dipped 1.5 basis points in early trade to around 0.36 percent, moving back towards two-month lows hit last week at 0.32 percent.
Other bond yields in the single-currency bloc were also down 1-2 bps on the day.
Uncertainty triggered by the latest nuclear test was felt across global markets, with stock markets in Europe opening lower and safe-haven gold rising to a 10-month high.
Analysts said a pick-up in bond supply this week was likely to limit any falls in bond yields in the euro area, while a holiday in the United States on Monday could subdue trade in European bond markets.
Lower-rated Portuguese bonds, undermined by general risk aversion, showed little immediate reaction to news on Friday of an upgrade to the country’s ratings outlook to positive from stable from ratings agency Moody’s.
Germany was also in focus after Chancellor Angela Merkel appeared to hold her ground in a television debate at the weekend ahead of elections later this month.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Dhara Ranasinghe; Editing by Catherine Evans