* Euro zone yields down 1-3 bps in early trading
* But hefty new supply curbs drop in yields
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
LONDON, Jan 8 (Reuters) - Euro zone government bond yields fell on Wednesday as investors sought safety following Iranian missile strikes on U.S. forces in Iraq, although the drop in yields was contained by a large supply of new bonds arriving this week.
Iran launched missiles at two bases in Iraq early on Wednesday, retaliating for the U.S. drone strike that killed an Iranian commander last week and stoked fears of a new Middle East war.
Equity markets fell, the price of gold rose and U.S. Treasury yields dropped, with the 10-year bond yield down around 4 basis points. In the euro zone, the moves downwards in government bond yields were limited.
“Supply should dominate over geopolitics with Iran’s missile attacks not triggering a larger escalation,” Commerzbank analysts said, noting that investors were still “keen to put money to work”.
Germany is set to raise 5 billion euros in 10-year debt and while France will come to the market on Thursday, Mizuho noted. A clutch of other countries are also raising funds in the first full week of euro zone trading in 2020.
“Given the strength of rates in the current risk-off environment, the market shouldn’t have too much problem taking down the (German) bond, though the large size might put it under some pressure given the other safe-haven supply coming in the week,” Mizuho analysts said.
By 0800 GMT, the 10-year German government bond yield was down close to 2 basis points to -0.297%. Yields in other core bond markets, such as in France, were down about the same. Italian yields were 1 to 2 basis points lower across maturities.
Upcoming data of interest for bond investors include a final reading on euro zone consumer confidence due at 1000 GMT and the ADP National Employment numbers in the United States.
Euro zone economic data have been improving in recent weeks, which has helped lift euro zone yields, many of which remain stuck in negative territory. Offsetting that has been the geopolitical tensions in the United States.
The 10-year German yield had gained to as high as -0.157% on Jan. 2, a seven-month high, before the U.S. killing of the Iranian commander.
Reporting by Tommy Reggiori Wilkes