* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
LONDON, July 28 (Reuters) - Euro zone government bond yields opened slightly higher on Tuesday but were still near lows reached in the previous session when U.S.-China frictions drove investors to safe-haven assets.
Germany’s 10-year bond yields had their biggest fall in over a month on Monday, as U.S.-China relations deteriorated sharply, turning markets cautious.
The threat of a second wave of COVID-19 infections further dampened risk appetite. Asian countries imposed new restrictions while Britain threw Europe’s summer reopening into disarray with a quarantine on travellers from Spain.
The European Central Bank upped its bond purchases last week, buying a net 27.183 billion euros ($31.89 billion) of assets as part of its quantitative easing programme, data on Monday showed.
“10y Bunds are staging the next test of the -0.50% level quicker than expected given lockdown fears and flow support,” wrote Commerzbank strategists in a note to clients.
“The ongoing improvement in sentiment indicators fails to convince as markets focus on a potential next round of lockdown measures,” they added.
German exporters grew more optimistic in July, the Ifo institute said.
The positive data comes after the Bundesbank said on Monday that the German economy is rebounding and may well continue to do so in the second half of the year, supported by the government’s fiscal stimulus measures.
But the benchmark Bund, which has been creeping towards -0.5%, was broadly flat at 0730 GMT, at -0.489%, having edged down after opening slightly higher.
In the periphery, Italian yields were up around 1-2 bps, with the 10-year yield at 1.063%.
As the periphery edged up, the spreads between German 10-year bonds and Italian, Spanish and Portuguese equivalents widened by around 1 basis point each .
The portfolio of Italian government bonds held by domestic banks rose to 442.16 billion euros ($517.19 billion) in June, the highest level since the numbers were compiled, European Central Bank data showed on Monday.
In terms of issuance, Germany is expected to issue 4 billion euros of its 7-year Bund with a 0% coupon. Italy is expected to issue 2-year and 10-year bonds.
“Although primary is picking up momentum with the tap of the 7y Bund Nov27 (followed by a 15y tap tomorrow), we expect a smooth absorption given the constructive backdrop and the Bund bid to extend and hold on to tactical longs and recommend using the overnight dip to add exposure,” Commerzbank strategists wrote.
The Federal Reserve meets on Tuesday and Wednesday. It is expected to maintain its whatever-it-takes approach and perhaps signal a tolerance for higher inflation in the long-run.
$1 = 0.8524 euros Reporting by Elizabeth Howcroft; Editing by Andrew Cawthorne