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UPDATE 2-Trump strife sends euro zone bonds yields tumbling
May 18, 2017 / 11:17 AM / 6 months ago

UPDATE 2-Trump strife sends euro zone bonds yields tumbling

* German Bund yields hit 2-week lows

* Other euro zone yields at multi-month lows

* U.S. political turmoil weighs on global markets

* Investors dial back rate hike bets in U.S., Europe

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, May 18 (Reuters) - Government bond yields in the euro zone fell to multi-month lows on Thursday as uncertainty over U.S. President Donald Trump’s future boosted demand for safe-haven bonds.

Reports that Trump may have had tried to interfere with a federal investigation and that he discussed sensitive security information with Russia have rattled markets in recent days, and a report on Thursday that his aides had numerous undisclosed contacts with Russian officials kept tensions highs.

The allegations surrounding Trump have thrown doubt over the future of the pro-growth policies he has promised and also raised the possibility that he may have to leave the White House prematurely.

“To some extent, people were pinning their hopes on a global reflation trade getting a boost from fiscal stimulus in the States,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

“The more Trump gets bogged down in the impeachment debate and the issues surrounding that, it reduces the likelihood that you get anything meaningful in terms of fiscal stimulus -- that’s the key factor here.”

Jittery investors opted for the safety of fixed income, sending the yield on Germany’s benchmark 10-year government bond down as much as 6 basis points to a two-week low of 0.32 percent , and U.S. equivalents down to their lowest level in almost a month at 2.18 percent.

Even yields on lower-rated euro zone bonds fell as the political turmoil in Washington clouded the outlook for global growth and inflation.

“U.S. politics is still the main in show in town,” said Rabobank fixed income strategist Lyn Graham-Taylor.

Portuguese yields fell to their lowest since October, French and Irish yields were the lowest since January, Spanish yields were the lowest in almost four months, and Italian yields were the lowest in over two months.

As investors scaled back expectations for a rise in U.S. interest rates next month, they also had a rethink about potential rate rises from the European Central Bank next year.

Money markets price in around a 45 percent chance of an ECB rate hike in early 2018, down from more than 50 percent earlier this week.

European Central Bank policymakers are preparing to dial back their extraordinary stimulus measures if the economy continues to improve, but that course of action is not yet certain, comments by three ECB rate setters and accounts of the latest meeting showed on Thursday.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Dhara Ranasinghe, editing by Pritha Sarkar

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