Euro zone bonds supported by stocks slide, geopolitical woes

By Dhara Ranasinghe

LONDON, Jan 25 (Reuters) - Most government bond yields in the euro area steadied on Tuesday, with a sharp sell-off in world equity markets and mounting concern about tensions over Ukraine supporting demand for safe-haven debt.

Having risen above 0% for the first time since 2019 almost a week ago, Germany's 10-year Bund yield has edged back down into negative territory.

It was at -0.09% DE10YT=RR in early trade, little changed on the day but close to almost three-week lows touched on Monday as tensions between Russia and the West over Ukraine gripped world markets.

Russia's troop build up near Ukraine's border alongside unease the U.S. Federal Reserve could slam on the brakes to contain inflation have rattled stock markets, to the benefit of safe-haven debt markets.

Italy's 10-year bond yield was flat at around 1.35% IT10YT=RR after Italian lawmakers failed to elect a new president in an initial secret ballot on Monday.

Prime Minister Mario Draghi remains the most likely contender, but worries his promotion to head of state might shatter his coalition government and trigger early national elections have complicated his prospects.

"The appetite to hold BTPs in a more uncertain global risk environment is likely to diminish further when domestic political uncertainty is on the rise," said Christoph Rieger, head of rates and credit research at Commerzbank.

And with the latest U.S. Federal Reserve decision out on Wednesday, some caution appeared to be setting into markets.

Investors have ramped up rate hike bets in recent weeks, with markets pricing in roughly four interest rate rises by the Fed this year to contain sticky inflation.

Against this backdrop, U.S. 10-year Treasury yields have jumped almost 25 basis points (bps) in January, dragging German Bund yields up roughly 8 bps.

"If you think about the relative move of the 10 year Treasury versus the 10 year Bund, I think that tells us that markets are much more optimistic about the U.S. compared to the euro zone," said Christoph Schon, senior principal of applied research at Qontigo, referring to the economic outlook.

"And maybe the fact that we're kind of still hovering around or slightly below that 0% mark, is a sign that investors are less optimistic about the euro zone."
Reporting by Dhara Ranasinghe Editing by Mark Potter

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