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* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Recasts to lead with German/US rally, adds quotes)
LONDON, June 3 (Reuters) - German 10-year government bond yields fell to fresh record lows on Monday, driven down by investors' dash for safe-haven assets that also sent two-year U.S. Treasuries into their biggest yield drop since the global financial crisis.
U.S. President Donald Trump's threats to slap punitive tariffs on Mexico unless the latter halted immigration across the border, marked an escalation in the trade war. He also removed preferential trade treatment for India
"The trade war is taking another leg higher which is negative in terms of global growth, demand, confidence and inflation and is also injecting a healthy dose of risk off which is all conspiring to push U.S. yields lower," said Richard McGuire, head of rates strategy at Rabobank.
German government bond yields extended last week's falls to hit new all time lows of -0.216% on Monday, tracking the sharp fall in U.S. Treasuries. The gap between two- and ten-year yields is now at the tightest since August 2016, a sign of worsening economic sentiment .
Two-year Treasuries have fallen 23 basis points in the last two trading sessions, their biggest two-day move down since October 2008. Ten-year Treasuries were also down six basis points to 2.08%, their lowest since September 2017., .
"Threats against Mexico have made it very clear he is willing to court or engender economic damage and what he is doing in Mexico is with an eye on next years elections, McGuire added.
Europe's domestic politics also kept downward pressure on German yields after Andrea Nahles, leader of Germany's Social Democrats (SPD) announcing she would resign after her party's lacklustre performance in European Elections.
This throws doubt on the durability of Chancellor Angela Merkel's ruling coalition with the SPD.
Berenberg chief economist Holger Schmieding assigned a 40% probability that this would mark the end of Angela Merkel's reign as chancellor.
Dutch bonds, also AAA-rated, also rallied strongly, with 10-year yields now firmly in negative territory at minus 0.18%, the lowest since Sept 2016.
ITALY AWAITS PM SPEECH Amid the broad euro zone bond rally, Italian yields too pulled back from earlier rises, with 10-year yields slipping six bps.
They had been up as much as 4 bps in early European trade after Prime Minister Giuseppe Conte threatened to resign, Italian newspapers La Repubblica and Il Corriere della Sera reported. He will hold a news conference at 1616 GMT.
Italian debt sold off heavily last week after the European Commission wrote to Italy, asking for an explanation as to why public debt rose in 2018 instead of falling as required.
Responding to the letter, Italy vowed to respect European Union fiscal rules in its next budget despite a pledge by the anti-austerity government to cut taxes. 1/8nL8N23752Y
It is now just over a year since the May 29 sell-off following the appointment of an interim president and calls for snap elections amid political turmoil in the country, which saw Italian bonds suffer their worse day in more than 25 years.
(Reporting by Virginia Furness; additional reporting by Giselda Vagnoni in ROME, Editing by William Maclean)