July 23, 2020 / 7:30 AM / 18 days ago

EU recovery fund optimism, US-China tensions bolster euro zone bonds

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

By Dhara Ranasinghe

LONDON, July 23 (Reuters) - Euro zone bond yields held near multi-month lows on Thursday, with demand for fixed income supported by U.S.-China tensions and hopes the bloc will bounce back quickly from the impact of COVID-19 given this week’s recovery fund deal.

The yield on Germany’s benchmark 10-year bonds, regarded as one of the safest assets in the world, was marginally higher in early trade as stock markets opened on a firmer tone.

But it held near Wednesday’s two-month lows around -0.50% , with safe-haven assets supported by renewed tension between the world’s biggest economies as Washington on Wednesday ordered to Beijing to close its consulate in Houston.

“The fact that financial markets shrugged off positive COVID-19 vaccine news earlier in the week, and reacted strongly to diplomatic tensions between the U.S. and China says something about market positioning in our view,” said Antoine Bouvet, senior rates strategist at ING.

“To spell it out more explicitly, we suspect investors might be trying to pare back their risk exposure into the summer months.”

More broadly, upbeat sentiment towards euro zone assets following this week’s deal by European leaders on a 750 billion euro ($868.50 billion) rescue fund to shore up economies hit hardest by the new coronavirus continued to underpin bond markets.

The impact has been seen most markedly in Italy, where 10-year bond yields hit a fresh 4-1/2 month low at 1.09%.

Italian bond yields are down 14 basis points this week and set for their biggest weekly drop in two months.

The closely-watched gap over benchmark German Bund yields is close to its tightest since late March. In a further sign of renewed demand for European debt, yields spreads in France, Spain and Portugal have all narrowed this week versus Germany to their tightest levels in weeks. ($1 = 0.8636 euros) (Reporting by Dhara Ranasinghe; editing by Barbara Lewis)

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