REFILE-UPDATE 2-Euro zone bond yields fall; German 30-year tap sees "outstanding" demand

(Corrects day in first paragraph)

* Euro zone periphery govt bond yields

By Elizabeth Howcroft

LONDON, Aug 19 (Reuters) – High-rated government bond yields fell 2-3 basis points on Wednesday and there was strong demand at a German auction of 30-year debt, with bond prices supported by U.S.-China tensions and European Central Bank bond purchases.

The S&P 500 and Nasdaq indexes hit all-time highs and European shares also rose after a wobbly start.

But core European bond yields still fell by 2 to 4 bps with bond prices rising for the fourth day in a row. Italian and Spanish government bond yields also fell.

Germany’s 10-year bond yield was at -0.475% at the market close, down 2 bps on the day, while the 10-year Italian bond yield was down 1.5 bps at 0.98%.

Daniel Lenz, a rates strategist at DZ Bank, said that after a sell-off in Bunds last week, the current rally was likely to continue as the 10-year yield moves towards -0.5%.

“Because of this trade war between the U.S. and China it seems that there is quite some demand for govvies at the moment, especially in the core segment,” he said.

There are no new high-level talks scheduled between the United States and China, after talks on Saturday were postponed.

“It must also be because of the strong demand in general from the ECB,” Lenz added, referring to the central bank’s emergency bond-purchasing programme which has pushed up bond prices.

Uncertainties about the U.S. economic recovery and fiscal stimulus package continued to weigh on sentiment.

Meanwhile, Lenz described demand at Germany’s sale of 1.25 billion euros ($1.49 billion) of 30-year bonds as “outstanding” after the bid-to-cover ratio came in at 2.91.

This was the highest demand at a 30-year Bund auction since at least 2005, a spokeswoman for the German debt management office said.

Euro zone annual inflation slightly rose in July and core indicators surged, even amid the deflationary pressures caused by the COVID-19 pandemic and economic crisis, data showed.

The five-year, five-year breakeven inflation forward — a key market gauge of inflation expectations which is watched by the European Central Bank — edged down further from 6-month highs hit last week.

Minutes from the Federal Reserve’s July meeting are due at 1800 GMT. ($1 = 0.8376 euros) (Reporting by Elizabeth Howcroft; additional reporting by Abhinav Ramnarayan; editing by Philippa Fletcher, Kirsten Donovan)

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