Investors stick with safe-haven bonds on trade, Brexit concerns

Credit: REUTERS/KAI PFAFFENBACH

Euro zone safe-haven bond yields dipped on Wednesday as trade tensions between China and the United States and renewed political uncertainty around Britain's exit from the European Union kept investors on edge.

By Tommy Wilkes

LONDON, May 22 (Reuters) - Euro zone safe-haven bond yields dipped on Wednesday as trade tensions between China and the United States and renewed political uncertainty around Britain's exit from the European Union kept investors on edge.

Washington's temporary relaxation of curbs against China's Huawei Technologies has failed to offset deeper worries about an intensifying trade war between the world's two largest economies.

Adding to the nervousness, British Prime Minister Theresa May's last-ditch attempt to deliver a Brexit deal was widely panned by lawmakers, setting Britain on course for another period of uncertainty and worrying investors who do not know when or whether the United Kingdom will leave the EU.

"The tone of re-nervousness has come from two sources. The re-escalation of the trade war ... and the tensions around the Brexit vote," said Matthew Cairns, a fixed income strategist at Rabobank.

Brexit uncertainty prompted investors to buy British government bonds, and pushed the 10-year Germany/Britain bond yield gap to its narrowest in six-weeks. DE10GB10=RR

The 10-year German Bund yield DE10YT=RR, the go-to safe-haven bond when investors are jittery, dropped more than 1 basis point to -0.07%.

The yield has risen from 2-1/2 year lows, of -0.13%, hit earlier this month, but few investors and analysts believe it can rise back into positive territory.

"10-year Bund yields are pinned down and we don't see them going anywhere soon," Cairns said, adding that Rabobank had an end-year forecast for the 10-year yield of -0.20%.

French FR10YT=RR and Dutch NL10YT=RR government bond yields were also marginally lower in early European trade.

Portugal hopes to raise 2 billion yuan from a Chinese yuan-denominated Panda bond - the first to be launched by a euro zone country. The country's finance minister said late on Wednesday Portugal expected to price the bond on May. 30.

Elsewhere, Italian yields fell, helped by opinion polls that suggest Deputy Prime Pinister Matteo Salvini's far-right party may not do as well at the European parliamentary elections as previously thought.

Investors are concerned a strong showing for Salvini - as well as other populist parties across Europe - will lead to another showdown between Rome and Brussels over Italy's budget plans.

The latest data on Italian growth will do little to soothe investor concerns either with national statistics bureau INSTAT slashing growth to 0.3% from the 1.3% projection it made in November.

Italy is "fiercely" committed to exceeding a government GDP growth forecast of 0.2% in 2019, Prime Minister Giuseppe Conte said on Wednesday.

Italian short-dated bond yields were around half a basis point lower to 0.60% for the 2-year and 1.76% for the 5-year. Its 10-year yield was 2.65% IT2YT=RRIT5YT=RR<IT10YT=RR>.

Investors had dumped Italian bonds last week, concerned about comments from Salvini that the indebted euro zone member would breach European fiscal rules, but have tiptoed back into the market this week.

Euro zone periphery govt bond yieldshttp://tmsnrt.rs/2ii2Bqr

German/British 10-year bond yield gap narrowest in six-weekshttps://tmsnrt.rs/2Eo4zze

(Additional reporting by Virginia Furness; Editing by Toby Chopra and Alison Williams)

((thomas.wilkes@tr.com; Reuters Messaging: thomas.wilkes.thomsonreuters.com@reuters.net))

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