May 15, 2019 / 10:31 AM / 4 days ago

UPDATE 2-German bond yields sink as investors shelter from trade war, Italy noise

* German 10-year bond yield hits new 2-1/2 year low

* Euro zone GDP data fails to calm investor jitters

* Italian yields extend rise on budget concerns

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds detail, updates prices)

By Tommy Wilkes and Virginia Furness

LONDON, May 15 (Reuters) - German bond yields sank deeper into negative territory on Wednesday as investors sought safety in the face of festering U.S.-Chinese trade tensions, global growth concerns and renewed worries about Italy’s budget plans.

While the bond rally eased somewhat following some conciliatory comments by U.S. President Donald Trump on auto tariffs, 10-year German yields stayed around minus 0.10%.

Italian yields, meanwhile, extended their rise after deputy prime minister Matteo Salvini said on Tuesday Rome was ready to break EU fiscal rules.

His remark drew a rebuke from his party’s governing partner and raised concern that the coalition could break-up.

Economy Minister Giovanni Tria later sought to calm market jitters and said the country’s budget goals stood, helping Italian yields to reverse their rise.

But investors remain nervous.

They spent much of Wednesday buying safe-haven bonds, even after data showed the German and wider euro zone economies grew in line with expectations in the first quarter. nL5N22R1JH]

The German economy’s return to growth was helped by higher household spending and a booming construction industry, but the increase is probably not the beginning of a sustained recovery, analysts from Capital Economics wrote in a note.

Peter Chatwell, head of rates strategy at Mizuho, put the Bund demand down to investor nerves about weak Chinese data, global trade tensions, and more posturing from the Italian governing parties ahead of European parliamentary elections.

“All of this is serving to put markets in a risk-off mode, generating a bid for bunds, and bearishness in BTPs (Italian government bonds), which are vulnerable,” he said.

The 10-year German bund yield dropped to its lowest since October 2016. The yield fell as much as six basis points to -0.13% before pulling upwards after Trump said he would delay a decision on imported car tariffs.

That steadied sentiment, helping global equity markets to claw back earlier losses.

The 30-year Bund yield had also slipped almost eight basis points to as low as 0.496%, also a 2-1/2 year low. It rose back towards 0.53 percent as the mood brightened.

U.S. Treasury yields have also been falling as investors look for safer places to park their cash. After a surprise drop in U.S. April retail sales, 10-year yields dropped five basis points to a seven-week low of 2.361%.

ITALIAN DISCORD

Short-dated Italian government bond yields extended the selloff triggered by Salvini’s Tuesday comments, with two-year yields up as much as eight basis points to 0.819%, the highest in 5-1/2 months.

Ten-year yields also touched new 2-1/2 month highs of 2.80% , up five basis points on the day. But they eased back in late European trade after Tria soothed trader fears.

But Salvini’s comments came at a time of heightened investor sensitivity to Italian risk, underscored by the lacklustre bond auction on Tuesday.

Salvini’s coalition partner and leader of the 5-Star Movement Luigi di Maio called it “irresponsible” to create market tensions by speaking about increasing the debt level.

Salvini’s comments also appear to dash investors’ hopes that a coalition breakdown would bring in a more fiscally prudent, right-wing government.

“This is not good news especially after the rumours of a break-up of the ruling coalition after the European election,” said Daniel Lenz, rates strategist at DZ Bank.

Additional reporting by Sujata Rao Editing by Mark Heinrich

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