April 11, 2018 / 11:29 AM / 7 months ago

UPDATE 2-Euro zone yields drop as U.S.-Russia tensions have investors seeking safety

* Yields across bloc drop towards lows

* Rising US-Russia tensions fuel safe haven assets bid

* Germany’s 10-year yield hits week low

* ECB says Nowotny’s view is not its own

* U.S. consumer prices posts first drop in 10 months in March

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites throughout)

By Fanny Potkin and Abhinav Ramnarayan

LONDON, April 11 (Reuters) - Euro zone government bond yields slipped on Wednesday as a tense standoff between the United States and Russia over Syria sent investors flocking into safe-haven debt markets.

U.S. President Donald Trump warned Russia of imminent military action in Syria over a suspected poison gas attack, declaring that missiles “will be coming” and lambasting Moscow for standing by Syrian President Bashar al-Assad.

Many of the world’s stock markets fell back into the red after two days of gains, further boosting safety plays such as government bonds and the yen. Germany’s 10-year bond yield, the benchmark for the bloc, dropped to a one-week low of 0.483 percent on the news.

Further pressure on euro zone borrowing costs came after data showed U.S. consumer prices in March fell for the first time in 10 months, reinforcing expectations the Federal Reserve will raise interest rates at a gradual pace.

U.S. Treasury yields slipped to 2.77 percent, down 2 basis points on the day. Euro zone bond yields were down 1-3 basis points by the end of trading, having first reversed Tuesday’s rise, as the European Central Bank distanced itself from a governing council member’s comments about moving away from deeply negative deposit rates.

ECB policymaker Ewald Nowotny told Reuters on Tuesday there was a possibility of a 20 basis-point hike in the deposit rate as part of ECB efforts to normalise policy. But a spokesperson said this did not represent the bank’s view.

“(It) ...is a very clear statement that the ECB is in favour of sequencing,” said DZ Bank strategist Daniel Lenz, referring to the expected plan that the key rate will remain at its current level until well after the bank ends its bond purchase programme.

Markets now expect the ECB to stop buying bonds by the end of the year, then raise interest rates for the first time since 2011 sometime in the second quarter of next year, even as inflation remains short of its target.

On Wednesday, ECB policymaker Ardo Hansson said euro zone inflation will eventually pick up as the economy grows, but the ECB needs to remain patient and remove stimulus only very gradually.

Euro zone government bonds have been in demand ever since growth in the continent’s economy stopped beating forecasts this year. Trade tensions between the United States and China have also kept the German 10-year bund around 0.50 percent.

Any full-blown trade war would be likely to upset the plans of major central banks to tighten policy - fuelling demand for government bonds.

ECB chief Mario Draghi said on Wednesday that the direct effect on the euro zone economy of trade tariffs announced by the United States and China is small but they can hurt investor confidence and trigger retaliation. (Reporting by Abhinav Ramnarayan; editing by John Stonestreet)

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