Wires

Euro zone bond yields at one-week highs as U.S.-Iran fears abate

Dhara Ranasinghe

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

LONDON, Jan 9 (Reuters) - Government borrowing costs rose across the euro zone to one-week highs on Thursday, reflecting easing tensions between the United States and Iran.

U.S. President Donald Trump on Wednesday tempered days of angry rhetoric and suggested Iran was "standing down" after it fired missiles at U.S. forces in Iraq, as both sides looked to defuse a crisis over the U.S. killing of an Iranian general.

Higher-rated euro zone bonds like the German Bund, considered a refuge during times of uncertainty, have benefited in recent days from geopolitical tensions in the Middle East.

But bonds were already starting to give up the gains in price on Wednesday, pushing yields higher, as perceptions grew that a more serious conflict would be avoided.

And in early Thursday trade, 10-year bond yields across the euro area rose to one-week highs. The benchmark German Bund yield was almost 4 basis points higher on the day at -0.22% , but still below last week's seven-month highs.

As geopolitical worries receded, analysts said growing bond supply might play a greater role in the market's direction.

"While Trump seems to be trying to somewhat diffuse the situation, we would remain cautious for the time being," said Peter McCallum, a rates strategist at Mizuho in London.

"Yet unless anything tangible takes place, theres the risk that this saga falls to the back of the markets mind and the onslaught of supply takes more of an effect on rates."

Euro zone governments have sold bonds this week at auctions or through syndicated bond deals, as issuance picked up at the start of the year.

France on Thursday is expected to sell 8 billion to 9.5 billion euros of long-dated debt at auction.

Spain also holds a bond auction, which could be a test of investor appetite after Socialist leader Pedro Sanchez won parliamentary backing on Tuesday for Spain's first coalition government in decades, ending a long political stalemate.

Both Ireland and Portugal sold long-dated bonds via a syndicate of banks on Wednesday in deals that saw strong investor demand.

(Reporting by Dhara Ranasinghe, editing by Larry King)