* German 10-year Bund yields hit 1-month low of 0.287 pct
* Italian debt sells off as risky assets suffer
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds latest Turkey story link, updates prices)
By Virginia Furness and Abhinav Ramnarayan
Aug 17 (Reuters) - German bond yields returned to one-month lows on Friday as the threat of more U.S. sanctions on Turkey hit the lira once again, boosting demand for safe-haven assets including high-grade euro zone government debt.
The lira weakened 5 percent on Friday after a Turkish court rejected a U.S. Christian pastor’s appeal for release, a day after Washington warned of further sanctions unless Ankara freed him.
Germany’s 10-year government bond dipped as low as 0.287 percent on Friday, its lowest in nearly a month and half what it was just three months ago, before settling at 0.30 percent by the close.
“It is remarkable how low Bund yields are right now, and of course this has to do with the safe-haven flows but you also have to take into account Bunds are very scarce right now,” said BBVA strategist Jaime Costero Denche.
“..The European Central Bank is still taking out some of the supply which is possibly exaggerating the flight to quality move.”
Turkish bonds and the lira had found some support on Thursday after Finance Minister Berat Albayrak told international investors the country would emerge stronger from its crisis and that its banks were healthy.
But that changed quickly on Friday, with the lira dropping another 7 percent at one stage.
Italian bonds have been hit particularly hard by the lira crisis, in part because of concerns over Italian banks’ exposure to the country and also because worries over Italy’s politics and spending plans has made its debt particularly vulnerable to any swings in risk sentiment.
Italian 10-year yields were 2 basis points higher on the day and the spread over Germany widened to 283 bps.
Spanish and Portuguese government bonds also inched higher, with 10-year yields up about 1 basis point.,
“Investors are sensitive to the headline risk that might come over the weekend,” said Commerzbank strategist Michael Leister, saying many might buy into German bonds just to avoid being exposed.
Reporting by Virginia Furness; Editing by Toby Chopra and John Stonestreet