September 4, 2017 / 10:56 AM / in 9 months

UPDATE 2-N.Korea nuclear test bolsters safe-haven German debt

* Periphery bonds outperform as euro seen keeping ECB cautious

* Euro zone periphery govt bond yields (Updates prices)

By Dhara Ranasinghe

LONDON, Sept 4 (Reuters) - Germany’s short-dated government bond yields dipped to their lowest levels in over four months on Monday after the sixth and most powerful North Korean nuclear test a day earlier lifted demand for safe-haven assets.

South Korea said on Monday it was talking to the United States about deploying aircraft carriers and bombers to the Korean peninsula after signs Pyongyang might launch more missiles.

The latest tensions over Korea added a new layer of uncertainty for euro zone bond investors in a week that would otherwise have been dominated by Thursday’s European Central Bank meeting and the monetary policy outlook.

“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, while the price of gold, another safe-haven asset, hit its highest in almost a year.

Two-year bond yields in Germany — the euro zone’s benchmark bond issuer — dipped to minus 0.769 percent, their lowest level since April.

Ten-year bond yields fell to as low as 0.36 percent , moving towards two-month lows hit last week at 0.32 percent, before pulling back slightly.

Overall, however, the impact on bond markets of the latest episode in the standoff between the United States and North Korea was limited.

Indeed, lower-rated debt, which is often in the firing line in times of risk aversion, outperformed German benchmarks as a stronger euro was expected to keep the ECB wary of reining in its bond-buying stimulus scheme too soon.

“Euro strength underlines the ECB will be cautious with its policy unwind,” said Richard McGuire, head of rates strategy at Rabobank.

Spain’s 10-year yields fell 4.7 basis points to 1.44 percent and Italian equivalents fell 3.3 bps to 2.04 percent, with the slide in yields accelerating towards the close.

Portuguese 10-year yields fell 2.1 bps to 2.83 percent after ratings agency Moody’s lifted the outlook on Portugal’s rating on Friday to positive from stable.

A holiday in the United States on Monday further subdued trade.

Germany was also in focus after Chancellor Angela Merkel appeared to hold her ground against her centre-left rival 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=

Reporting by Dhara Ranasinghe; Editing by Ralph Boulton

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