January 6, 2020 / 8:17 AM / 13 days ago

Safe-haven German Bund yield at near three-week low on US-Iran tension

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

By Dhara Ranasinghe

LONDON, Jan 6 (Reuters) - Yields on safe-haven German government bonds dipped to their lowest in almost three weeks on Monday, as tension between the United States and Iran remained high after the killing of a top Iranian general in a U.S. drone strike in Iraq last week.

Iraq’s parliament called on Sunday for U.S. and other foreign troops to leave as a backlash grew against Friday’s killing of Iranian general Qassem Soleimani. President Donald Trump renewed threats to target Iranian cultural sites if Tehran retaliates.

The attack has left U.S.-Iranian hostilities in uncharted waters, rattling world markets at the start of 2020 just as an easing in U.S./China trade tensions along with better economic data had boosted investor sentiment.

That in turn has pushed yields on euro zone government bond down from multi-month highs reached just before Friday’s U.S. air strike.

In early Monday trade, the yield on Germany’s benchmark 10-year bond yield fell to its lowest level in almost three weeks at -0.306% — down 15 basis points from Thursday’s seven-month highs.

The German bond yield curve, as measured by the gap between 10 and two-year bond yields, was near its flattest in three weeks.

“The bond market has picked up and there has been bull flattening in the curve,” said Henry Occleston, rates strategist at Mizuho in London.

“The question now is how long is this situation going to last and will the tensions escalate? Right now, it appears it’s not going to go away quickly.”

Across the euro area, most 10-year bond yields were one to two basis points lower on the day . U.S. Treasury yields were steady near one-month lows.

Analysts said with geopolitical tensions growing, this week’s government bond auctions should go well. Austria, Germany, France and Spain all plan to sell bonds this week.

In Spain, Socialist leader Pedro Sanchez failed on Sunday in a first attempt to get parliament’s backing to form a government. That had been anticipated in bond markets, analysts said, and Spain’s 10-year bond yield was just one bps lower at 0.38%

Sanchez is expected to succeed in a second vote on Tuesday, when only a simple majority is needed. He is likely to get that after securing a commitment from Catalonia’s largest separatist party, Esquerra Republicana de Catalunya, to abstain.

Reporting by Dhara Ranasinghe, editing by Larry King

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