Wires

German bond yields fall for first time in over week as US warns of tariffs on EU

Dhara Ranasinghe

EU@

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

LONDON, Oct 3 (Reuters) - Government bond yields in safe-haven Germany fell for the first time in over a week on Thursday after the United States said it would impose tariffs on the European Union, heightening recession risks facing the bloc.

A rally in euro zone bond markets stalled in the past week -- even as U.S. Treasury prices have shot and yields tumbled -- as concern grows that the European Central Bank has limited ammunition to boost growth and inflation in the bloc.

But as stock markets came under renewed selling pressure, the pull of safe-haven government bond markets was too strong for jittery investors.

The United States on Wednesday said it would slap 10% tariffs on European-made Airbus planes and 25% duties on European products such as French wine as punishment for illegal EU aircraft subsidies.

The announcement came after the World Trade Organization gave Washington a green light to impose tariffs on $7.5 billion worth of EU goods annually in the long-running case, a move that threatens to ignite a tit-for-tat transatlantic trade war.

In early trade, 10-year bond yields across the bloc fell 1-3 basis points.

Benchmark German 10-year Bund yields were down 2.2 bps at -0.57%, falling for the first time in over a week.

"The fall in yields stems from everything such as the slide in U.S. and European stock markets," said KBC rates strategist Mathias van der Jeugt.

"The thing that has been striking is that German Bunds didn't profit yesterday from the U.S. Treasury rally -- that could be because of pressure from German institutions to drop the 'black zero' and also everyone is aware that the ECB has no ammo left to fight a downturn."

Germany's economic institutes on Wednesday called on Berlin to ditch its 'black zero' budget policy of not contracting new debt if the growth outlook for Europe's largest economy should deteriorate further.

Weak business activity data from both Germany and the United States have stoked concerns about global recession risks, with U.S. two-year Treasury yields falling sharply on Wednesday.

Hefty new bond supply from France and Spain later this session limited the rally in European bond markets.

France is scheduled to sell up to 9.5 billion euros of new debt including a new 10-year bond, while Spain sells long-dated bonds. (Reporting by Dhara Ranasinghe Editing by Shri Navaratnam)