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UPDATE 2-Italy stars as trade war jitters lift euro zone bonds

* Italy/Germany spread at tightest in nearly 2 months

* Trade war fears lift demand for government bonds

* Euro zone inflation rises 1.4 pct in March

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Writes through)

LONDON, April 4 (Reuters) - Euro zone borrowing costs fell on Wednesday, led by Italy, as rising U.S.-China trade tensions lifted demand for safe-haven assets and data showed inflation in the bloc picked up last month but remained subdued.

China said on Wednesday it will impose additional tariffs of 25 percent on 106 U.S. goods including soybeans, autos, chemicals, some types of aircraft and corn products, among other agricultural goods.

Those countermeasures comes as Trump administration pushed ahead with plans to slap tariffs on about $50 billion of Chinese industrial and technology products.

The news sent jitters through Asian and European stock markets and in the United States the Dow Jones Industrial Average dropped over 1 percent at the open before recovering some of the losses.

"It has been another soggy day for international stock markets, and this has benefited bond markets," said Rabobank strategist Richard Maguire.

"The fact that Italy has outperformed shows the de-correlation of peripherals from risky assets," he said.

Italy's 10-year yields, which move inversely to price, fell 4 basis points to a 3-1/2 month low of 1.74 percent, and the spread over benchmark Germany was at its tightest in nearly two months at 124 bps.

Germany's benchmark 10-year bond yield dipped back below 0.50 percent and towards 2-1/2 month lows hit last week.

In addition to concerns over a potential global trade dispute, yields were also pushed lower by tepid euro zone inflation data.

Consumer prices in the bloc rose 1.4 percent year-on-year in March, up from 1.1 percent in February and in line with market expectations.

The core measure of inflation, which strips out the volatile prices of energy and unprocessed food, rose to 1.3 percent year-on-year in March from 1.2 percent.

But another core inflation measure that market economists look at, which also excludes the prices of alcohol and tobacco, was stable at 1.0 percent for a third consecutive month.

That, said analysts, confirmed a view that any unwinding of European Central Bank stimulus will be protracted as the central bank struggles to hit its near 2 percent inflation target.

"The broader picture is that the lack of inflation despite very good growth is a sign that it will be hard for the ECB to see inflation rise towards target before QE (quantitative easing) ends," said Societe Generale rates strategist Ciaran O'Hagan.

Ten-year bond yields across the euro area were lower on the day, keeping close to multi-month lows hit recently.

"It is not our view to expect risk aversion to sustainably rise, even though nervousness is indeed high," Manuel Oliveri, currency strategist at Credit Agricole, said in the Reuters Global Markets Forum.

Elsewhere, Germany sold around 2.5 billion euros of 5-year bonds.

(Editing by Alison Williams)