January 6, 2020 / 11:12 AM / 11 days ago

UPDATE 2-German 10-year bond yield touches three-week low amid Mideast tensions

* German Bund yield falls to -0.31% as U.S.-Iran tensions dominate

* Oil slips after hitting $70, U.S. indexes recoup some losses

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds detail on U.S. market moves)

By Dhara Ranasinghe

LONDON, Jan 6 (Reuters) - Germany’s 10-year bond yield dropped on Monday to its lowest in more than three weeks as tensions between the United States and Iran following the U.S. killing of an Iranian general fueled demand for safe-haven assets.

The deadly attack in Iraq last week has left relations between Washington and Tehran in uncharted waters, rattling world markets just as an easing in the Sino-U.S. trade dispute and better economic data had boosted investor sentiment.

Iraq’s parliament called on Sunday for American and other foreign troops to leave the country as part of a growing backlash against Friday’s killing of Iranian general Qassem Soleimani in a U.S. drone strike.

Tehran has threatened to avenge Soleimani while U.S. President Donald Trump renewed threats to target Iranian cultural sites.

All that has pushed euro zone government bond yields down from multi-month highs reached just before Friday’s killing while other “safe” assets such as U.S. Treasuries and gold were also in demand.

The yield on Germany’s benchmark 10-year bond, an asset that usually gains during global uncertainty or risk, briefly fell to -0.31% - its lowest in more than three weeks.

Yields later inched back up to close at about 0.285%, unchanged on the day, as U.S. stocks recouped some of their losses and oil prices slipped from an earlier peak of $70 a barrel.

But the German benchmark yield still remains about 15 basis points below Thursday’s seven-month high.

The German bond yield curve, measured by the gap between 10- and two-year bond yields, was close to 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.”

Most 10-year bond yields across the euro zone ended flat to a touch lower , with French yields too hitting their lowest levels in about three weeks.

U.S. 10-year Treasury yields were just off one-month lows but a rise in shorter-dated two-year yields took the Treasury yield curve to its flattest since mid-December.

Geopolitical tensions were seen overshadowing prospects for better economic growth for now, keeping bond yields down. That backdrop should also help markets absorb new debt supply, with Austria, Germany, France and Spain to hold auctions this week.

“We think the shock to confidence and potential for a drop in consumption are more pressing concerns for investors, the (yield) curve should thus remain flat until and unless tensions ease,” said Antoine Bouvet, senior rates strategist at ING, referring to the sudden rise in geopolitical tensions.

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, leaving Spain’s 10-year bond yield steady at 0.39%

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

Reporting by Dhara Ranasinghe; Editing by Larry King and David Clarke

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