* German Bund yields hit two-week low amid U.S. worries
* ECB minutes due for release
* ECB’s Coeure: Should not wait too long to trim stimulus
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Writes through)
By Dhara Ranasinghe
LONDON, May 18 (Reuters) - Germany’s benchmark 10-year Bund yield fell to a two-week low on Thursday as political strife in the United States underpinned demand for safe-haven assets, but there was also a note of caution as focus shifted to the ECB’s policy outlook.
The European Central Bank should not wait too long before paring back stimulus once it is convinced that inflation has recovered, and it could in theory raise rates early if necessary, ECB board member Benoit Coeure told Reuters in an interview published on Thursday.
Minutes from the ECB’s April meeting are released later in the day, adding a sense of caution to a bond market that saw hefty price gains on Wednesday as political turmoil in Washington stoked concern that U.S. President Donald Trump would delay his plans to cut taxes and raise infrastructure spending.
The U.S. Justice Department, in the face of rising pressure from Capitol Hill that has included the mention of impeachment, on Wednesday named former FBI chief Robert Mueller as special counsel to investigate alleged Russian interference in the 2016 U.S. election and possible collusion between President Donald Trump’s campaign and Moscow.
“A general unwinding of Trump reflation trades was reflected across markets yesterday and we could get more of the same today,” said Ciaran O‘Hagan, a strategist at Societe Generale. “The ECB has the potential to surprise.”
Germany’s benchmark 10-year government bond yield was down 2 basis points at 0.36 percent, a two-week low.
U.S. Treasury yields were 2 basis points higher , pulling back from one-month lows hit the previous session when the gap between U.S. and German bonds yields narrowed to its tightest level in six months.
Most other euro zone bond yields were flat to a touch lower on the day, pausing after strong falls this week.
Sentiment towards euro zone assets has received a strong boost in the past two weeks as investors move past the French presidential election and focus on efforts to bolster the currency bloc and stronger economic data.
That has also contrasted with political strife in the United States, the world’s biggest economy.
In another sign of firm demand for euro zone bonds, institutional investors snapped up 1 billion euros of Italy’s new “BTP Italia” bond, maturing in May 2023, in the first 10 minutes of trading on Thursday.
Long-dated bond sales in France and Germany this week have drawn solid demand. France and Spain are due to hold bond auctions later on Thursday.
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Editing by Catherine Evans