January 10, 2019 / 11:31 AM / 5 months ago

UPDATE 3-Euro zone bond yields fall as investors seek safety amid economy concerns

* German, French debt yields slip as demand grows

* Analysts say investors are seeking safety

* Portuguese yield in big fall after successful sale

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

By Tommy Wilkes

LONDON, Jan 10 (Reuters) - French and German government bond yields slipped towards recent two-year lows on Thursday as soft data out of China and caution about the economic outlook boosted demand for top-rated debt.

The decline in yields followed falls across the board on Wednesday. Strong demand at bond sales by Belgium, Ireland and Portugal was welcomed by investors, who had been worried an avalanche of supply could trigger market volatility.

Data showed China’s producer prices rose in December at their slowest pace in more than two years, while French industrial production fell more than expected in November. That added to worries the euro zone’s second-biggest economy was faltering amid disruption caused by anti-government protests.

European Central Bank policymakers suggested revisiting the use of cheap, multi-year loans to banks, according to the minutes of the ECB’s December meeting at which they also said the outlook was “fragile and fluid”.

Bond markets showed little reaction.

Yields would be lower if the market was not digesting heavy supply, said Peter Chatwell, rates strategist at Mizuho.

Unlike stock markets, which have recovered since Federal Reserve Chairman Jerome Powell said last week the U.S. central bank might pause its tightening, bond investors appear more cautious.

Chatwell said investors had money to put to work coming into 2019 and were buying the euro zone debt deemed the safest because of nerves about the global economy and expectations the European Central Bank could hold off raising rates in 2019.

Money market investors are now pricing in just a 57 percent chance of a euro zone rate increase this year.

Money managers have been “underinvested in euro zone bonds”, he said. “There was money that had been on the sidelines but is now being invested.”

Germany’s benchmark 10-year yield fell 2 basis points to 0.196 percent. French yields were also lower, with the 10-year yield dropping by 3.5 basis points to 0.6765 percent.

The edgy mood was heightened by a breakdown in talks between U.S. President Donald Trump and Democratic leaders aimed at ending a shutdown of the U.S. government, said Daniel Lenz, a strategist at DZ Bank.

“It’s already having an economic impact and could explain why yields are a bit lower on the day,” he said.

Optimism over progress in U.S.-China trade talks also faded, knocking sentiment.

PORTUGUESE YIELD DROP

Portugal, buoyed by strong demand for its bond sale on Wednesday, saw the yield on its 10-year bond fall by more than 7 basis points to 1.71 percent, putting it on course for its biggest one-day drop since mid-June 2018.

The Spanish benchmark 10-year bond yield fell 4 basis points to 1.45 percent.

Italian government bond yields, which have risen in recent sessions after hitting five-month lows in early January, were little changed on the day.

The two-year Italian bond yield stood at 0.5190 percent, up 2 basis points, and the 10-year slightly higher at 2.911 percent. (Reporting by Tommy Wilkes, editing by Larry King, Susan Fenton and Kirsten Donovan)

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