April 11, 2017 / 7:50 AM / 9 months ago

Investors shelter in safe German bonds as U.S. talks tough on Syria

* Geopolitics rattles financial markets

* German Bund yields drop below 0.20 pct

* French election also frays investor nerves

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By John Geddie

LONDON, April 11 (Reuters) - Safe-haven German Bund yields dipped below 0.20 percent for the first time in more than five weeks on Tuesday after the United States said it may authorise more strikes on Syria in a move that would escalate tensions with Russia.

Across global markets, assets seen as low risk such as highly-rated debt, gold and stable currencies like the Japanese yen were in demand, while stocks fell.

Following a cruise missile strike on a Syrian air base last week, the White House said on Monday it was ready to retaliate if the Syrian government uses chemical weapons or deploys barrel bombs in the country.

This comes as pressure is building on Russia to cut its ties with Syrian President Bashar al-Assad, with some countries proposing further sanctions on Moscow.

The Group of Seven major global powers were joined by Middle East allies on Tuesday in a push to isolate Assad, hours before the U.S. secretary of state flies to Moscow.

“Market moves generally fit with the theme of a moderate risk-off tone amidst on-going geopolitical concerns,” RBC’s global macro strategist Peter Schaffrik said.

Analysts said European markets were also reeling from the latest twist in the race for the French presidency, as far-left candidate Jean-Luc Melenchon climbs in opinion polls.

This has raised the possibility that Melenchon could square off against far-right leader Marine Le Pen - both of whom are eurosceptics - in the election’s decisive second round in May.

Japanese investors dumped a record amount of French bonds in February, data from Japan’s Ministry of Finance showed on Monday.

German 10-year bond yields dropped around 3 basis points to 0.192 percent on Tuesday, the lowest since Feb 27.

French equivalents rose 2 basis points to a one-week high of 0.96 percent. The gap between the two benchmarks held at its widest in six weeks at 75 basis points.

Yields on low-rated bonds of southern European countries like Italy and Portugal also rose as investors ditched riskier assets.

Later, the Netherlands will sell 0.75-1.25 billion euros of bonds maturing in January 2033.

Austria is also selling a new 10-year bond via a group of banks, with the deal expected to price later on Tuesday, IFR reported.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Editing by Andrew Heavens

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