UPDATE 1-Demand for safe German government debt rises; riskier government bonds fall

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates throughout, updates prices, adds comment)

By Elizabeth Howcroft

LONDON, June 10 (Reuters) – Demand for safe euro zone government debt rose on Wednesday and Germany’s re-launch of its 30-year bond drew strong demand, while riskier Italian, Spanish and Portuguese bonds fell as investors turned more cautious.

Germany received more than 44 billion euros’ ($50 billion) worth of demand for its 30-year Bund reopening, demonstrating investor interest in safe government debt even with global markets showing signs of optimism as economies revive.

Several governments launched syndicated bond sales on Tuesday and the supply continued on Wednesday, with Finland also launching a new 20-year benchmark bond.

“There is huge demand for bonds from the euro zone, especially for Bunds, for safe havens, so I would say most people don’t trust the recent optimism that you can see in the market,” said Rene Albrecht, a rates strategist at DZ Bank.

Portugal also sold 1.51 billion euros of six- and 10-year bonds in an auction.

Bond yields usually rise during a sale as investors make room for the new supply.

The spread between Germany and Italy’s 10-year government bond yields had widened by more than 9 basis points to 179.45 at 1040 GMT.

Germany’s benchmark 10-year Bund yield was down one basis point at -0.32% DE10YT-RR, with French and Dutch 10-year government bond yields also down by a similar amount .

Demand for riskier Italian debt fell slightly, with Italy’s 10-year government bond yield up 2 bps at 1.479%. Spanish and Portuguese benchmark yields were up by 3 to 5 bps .

The debt has been boosted recently by prospects of a European Union 750-billion-euro recovery fund, which could help the worst-hit countries rebound from the coronavirus pandemic.

The European Central Bank (ECB) exceeded expectations and increased its emergency bond purchases by 600 billion euros last week, which also boosted southern European debt.

Asset purchases have been crucial to holding down the borrowing costs of highly indebted member states. But Wednesday’s rising spreads show investors turning more wary.

The OECD said the global economy will suffer the biggest peace-time downturn in a century before it emerges next year from a coronavirus-inflicted recession.

“It’s reasonable to assume there will be another downturn in yields if the incoming data doesn’t confirm the recent optimism,” DZ Bank’s Albrecht said.

“The degree of optimism that can come from the European recovery fund is already priced in,” he said, adding that investors would wait and see what decisions are made about the fund’s set-up.

Investors will also be focusing on the Federal Reserve’s meeting. No new action is expected, but any hint of lessening stimulus could hammer risk sentiment. ($1 = 0.8800 euros) (Reporting by Elizabeth Howcroft Editing by Alex Richardson/Mark Heinrich)

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