July 27, 2020 / 7:48 AM / 19 days ago

Safe-haven German Bunds supported by US/China tension

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

By Dhara Ranasinghe

LONDON, July 27 (Reuters) - Germany’s benchmark 10-year bond yield dipped on Monday in a sign that unease in world markets over rising U.S./China tensions was driving investors into safe-haven assets.

China took over the premises of the U.S. consulate in the southwestern city of Chengdu on Monday, after ordering the facility to be vacated in retaliation for China’s ouster last week from its consulate in Houston, Texas.

The worsening relations between the world’s two biggest economies boosted safe havens such as gold and government bonds, allowing German debt to recover from price losses on Friday sparked by stronger-than-expected purchasing managers’ (PMI) data.

Germany’s 10-year bond yield was last down about 1.5 basis points at -0.456%, having risen 4 bps on Friday.

“Risk assets are struggling ... while for Bunds the textbook reaction to the PMIs combined with another failed test of the -0.50% level leaves 10-year yields in the middle of the range,” said Commerzbank rates strategist Michael Leister.

Italian bond yields were a touch lower, with sentiment towards the periphery supported by growing confidence that aggressive fiscal and monetary stimulus in the euro area will help cushion its economy from the coronavirus hit.

Italy’s 10-year bond yield dipped to 1.06%, holding close to a 4-1/2 month low hit last week. The gap over benchmark 10-year German Bund yields briefly narrowed to around 148 bps, its tightest in five months.

European Union leaders last week reached a deal on a 750 billion euro ($878 billion) COVID-19 recovery fund, agreeing to raise billions of euros on capital markets on behalf of all its 27 states, in an act of unprecedented solidarity.

“We think it (the Italian/German bond yield spread) could tighten another 15-20 bps from here, the number matters less than the direction,” said Jorge Garayo, senior rates strategist at Societe Generale. “The recovery fund is significant because it marks a very important step towards something that was previously taboo - fiscal transfers.”

$1 = 0.8542 euros Reporting by Dhara Ranasinghe Editing by David Holmes

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