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UPDATE 1-German Bund yield eyes record low as Trump's Mexico tariff row rattles markets

Dhara Ranasinghe

rattles markets@

* German Bund yield within whisker of record lows

* Dutch 10-yields negative for first time since 2016

* Trump Mexico tariff news, China PMI raise recession fears (Updates throughout with bond moves, quotes, context)

LONDON, May 31 (Reuters) - Germany's benchmark 10-year bond yield fell to within striking distance of record lows on Friday, after U.S. President Donald Trump's threat to impose tariffs on Mexican goods heightened recession fears and rattled world markets.

The global outlook darkened further when a key measure of Chinese manufacturing activity in May disappointed.

And dovish comments from the Federal Reserve's Richard Clarida, that the Fed would act if inflation stays too low or global risks endanger the economic outlook, added to a sense that a U.S. rate cut could come sooner rather than later.

"The Trump Mexico tariffs surprised me and more so than the escalation in the trade war with China," said Jan von Gerich, chief market strategist at Nordea. "This news is negative for markets and the economic outlook."

Government bond yields across major markets slid again, reflecting heightened pessimism as investors flocked to safe assets.

Germany's 10-year bond fell three basis points to minus 0.201%, within striking distance of record lows hit in July 2016 just after Britain voted to leave the European Union. It was set to end May with a fall over 20 bps.

Yields on Dutch 10-year bonds became the latest to drop into negative territory - moving below 0% for the first time since 2016.

"The signals we are getting from the bond markets are real," said Nordea's von Gerich.

U.S. Treasury yields resumed their slide, while European equity markets fell sharply at the open and U.S. stock futures pointed to pain on Wall Street.

The U.S. yield curve, as measured in the gap between three-month and 10-year bond yields , was at its most inverted since 2007 in a sign of growing investor concern about recession risks.

U.S. 10-year Treasury yields are down around 34 bps this month and set for the biggest monthly fall since June 2016. (Reporting by Dhara Ranasinghe, Editing by Susan Fenton)