UPDATE 1-German Bund yields fall to 2-1/2 week low as US/China trade worries bite

Germany's 10-year bond yield tumbled to a 2-1/2 week low on Wednesday as renewed concern about the direction of U.S./China trade talks swept through world markets, denting stocks and boosting demand for safe-haven assets.

U.S. President Donald Trump said on Tuesday the United States would raise tariffs on Chinese imports if no trade deal is reached with Beijing. News that the U.S. Senate has passed legislation aimed at protecting human rights in Hong Kong, sparking anger from China, only exacerbated concern about trade tensions between the world's two biggest economies.

"It's all about the sentiment on trade, even the Phase 1 deal is at risk of being delayed so we have this classical risk-off trade taking place again," said Commerzbank rates strategist Rainer Guntermann. "Equities are lower and safe-havens such as Treasuries and Bunds are in demand."

Having traded in a narrow range for the past two sessions, 10-year yields across the euro area fell 3-4 bps each. In Germany, the bloc's benchmark bond issuer, 10-year bond yields fell to as low as -0.356% - down 14 bps from five-month highs hit earlier this month.

U.S. 10-year Treasury yields also fell to a 2-1/2 week low around 1.73%. There was some focus on Italy, where proposals to reform the euro zone's bailout fund, the European Stability Mechanism (ESM), have created a political storm.

A draft of the reform was agreed by eurozone finance ministers in June and is due to be finalized by leaders next month. Italian officials say they are against proposals that would make it easier to restructure eurozone sovereign bonds in the event of a financial crisis. Foreign Minister Luigi Di Maio told daily Corriere Della Sera on Wednesday that reform of the ESM may be unacceptable to Italy.

Southern European bond yields slipped on Wednesday, having risen sharply on Tuesday. Peripheral debt markets remained vulnerable to a shift in sentiment towards risk assets, analysts said.

In recent weeks peripheral bonds have parted ways with higher-rated issuers such as Germany and France, bearing the brunt of profit-taking in bond markets. Rabobank said in a note that the selloff in peripheral bonds had not been matched by a rise in demand for credit default swaps, essentially the cost of insuring against default. This suggested that the selling was more related to positioning than a change in the underlying outlook, Rabobank said.

NatWest on Wednesday said in its 2020 outlook that it would not be surprising if the Italian/German 10-year bond yield spread tightened to 100 bps over the next six months. The gap is at around 164 bps. Elsewhere, Germany sold 30-year bonds in its last sale of the ultra-long dated bonds this year.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)