April 12, 2018 / 10:29 AM / a year ago

UPDATE 2-Euro zone yields held low by geopolitical risk concerns

* ECB March minutes hurts euro, lifts yields a touch

* But euro zone bonds still near recent lows

* Geopolitical concerns boost demand for safe-haven assets

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds ECB minutes, updates prices)

By Fanny Potkin

LONDON, April 12 (Reuters) - Euro zone yields edged higher on Thursday but held near recent lows as possible U.S. military action against Syria stoked geopolitical risk concerns and boosted demand for safe-haven assets.

Although the release of minutes of a European Central Bank meeting hit the euro and pushed yields a touch higher, euro zone borrowing costs generally were close to recent multi-month lows.

ECB policymakers in March expressed concern over the risk of a full-fledged trade war with the United States and fretted over the potentially harmful impact of the euro’s strength, the minutes of the meeting showed.

This hit the euro, which was down 0.4 percent against the dollar at 1.2315, while euro zone government bond yields were flat to 2 basis points higher across the board.

However, investors have been rattled by U.S. President Donald Trump’s threat of military action in Syria, which sent oil prices to their highest levels since late 2014, and kept the demand for high-grade euro zone bonds healthy.

Trump tweeted on Wednesday that missiles “will be coming”, taunting Russia for supporting Syrian President Bashar al-Assad after a suspected chemical attack on rebels.

His comments raised the prospect of direct conflict over Syria for the first time between the two world powers backing opposing sides in the seven-year-old civil war, which has also escalated a rivalry between Saudi Arabia and Iran.

Germany’s 10-year bund yield, the benchmark for the bloc and a traditional safe-haven asset, hovered around 0.51 percent towards the close, a basis point higher on the day.

Its U.S. counterpart traded as much as 3 basis points higher at 2.82 percent after minutes from the Federal Reserve’s last policy meeting showed policymakers felt the U.S. economy would firm further and inflation would rise in the coming months.

“The ECB accounts from the overall rather unexciting March meeting will be scrutinised for hints whether or how the ECB may change its wording next time,” Commerzbank analysts wrote.

ECB policymakers Benoit Coeure, Jens Weidmann and Vitor Constancio are due to speak on Thursday. Coeure suggested previously that the role of rates guidance could be strengthened, but did not give specifics.

Continuing concern over a prolonged trade dispute between the United States and China have been keeping markets on edge.

China’s Commerce Ministry said on Thursday that trade negotiations with the United States would be impossible because Washington’s attempts at dialogue were not sincere and vowed to retaliate should Trump escalate current tensions.

Elsewhere, Italy sold 9.17 billion in bonds maturing in 2021, 2025, 2038 and 2048.

Italian debt has outperformed, with the premium investors demand to hold 10-year bonds over top-rated German debt at 131 basis points, close to its tightest level since 2016.

Italian President Sergio Mattarella is scheduled to hold further talks on Thursday and Friday to try to stitch together a new government after an inconclusive March 4 election. (Reporting by Fanny Potkin Editing by Alison Williams/David Goodman/Alexander Smith)

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