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UPDATE 3-Battered euro zone bonds win respite, Bund yields at 2-1/2 week low
February 8, 2017 / 10:25 AM / 10 months ago

UPDATE 3-Battered euro zone bonds win respite, Bund yields at 2-1/2 week low

* Euro zone bond yields sharply lower

* Analysts say markets correcting after sharp rises

* Demand for safe-have Bunds still firm

* German Bund yields fall to 2-1/2 week low

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts with fall in bond yields)

By Dhara Ranasinghe and Abhinav Ramnarayan

LONDON, Feb 8 (Reuters) - Euro zone bond yields fell sharply on Wednesday as investors moved back into markets like France that have been hit hard in recent days by political uncertainty.

Still, a backdrop of political risks as well as a sell-off in equity markets continued to provide support for safe-haven German Bunds, pushing yields to 2-1/2 week lows.

Jitters surrounding upcoming presidential elections in France, concerns about the fallout for the euro area and speculation about an unwinding of European Central Bank monetary stimulus have hurt most euro zone bond markets in recent weeks.

Having jumped sharply in a short space of time, there was some reversal of recent yield rises on Wednesday.

France’s 10-year bond yield was down 9 basis points at 1.01 percent, narrowing the gap over German peers to around 71 bps from 79 bps hit in early trade, which was the highest since November 2012.

Across the region, bond yields were down 5-9 bps, with the Italian/German 10-year yield spread also pulling back from multi-month highs touched earlier .

“It is a slight correction to what is a pronounced trend - we are basically seeing the Italian spread (to Germany) at around 200 basis points,” said Rabobank’s head of rates strategy Richard McGuire.

“If you step back, the big picture still remains - that of political concerns in Europe concomitant with speculation over ECB tapering.”

The ECB is set to reduce its bond purchases from April onwards from the current rate of 80 billion euros per month to 60 billion euros until the end of 2017.

ECB President Mario Draghi looked to play down concerns about tapering this week, saying the euro zone’s economic recovery is picking up strength but still requires stimulus.

Germany’s benchmark 10-year Bund yield fell 6 basis points to a low of 0.29 percent, mirroring falls in U.S. and British bond yields.

“The move in Bund yields is not that different from other markets such as the U.S.,” said Societe Generale strategist Ciaran O‘Hagan. “Equity markets are also in the red.”

Uncertainty has been surrounding the single currency bloc in recent weeks. At the forefront are the presidential bid of anti-euro, far-right leader Marine Le Pen in France, and the mounting challenge to Chancellor Angela Merkel when Germans go to the polls in the autumn.

Japanese investors - one of France’s key investor bases - sold 232 billion yen (1.94 billion euros) in French bonds in December, logging their biggest net selling since June 2015.

In addition, investors in cash-strapped Greece appear to be losing faith in a pledge from European officials five years ago that the country’s default would be a one-off.

Germany meanwhile raised 2.483 billion euros in a top-up of its 0.25 percent, 10-year Bund and Portugal’s borrowing costs rose at an auction on Wednesday. (Reporting by Abhinav Ramnarayan; Editing by Mark Trevelyan)

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