German 30-year yields drop from 14-year high on Ukraine uncertainty

By Stefano Rebaudo

Aug 13 (Reuters) - German 30-year bond yields fell on Wednesday, retreating from a 14-year high hit the previous day, as investors stepped back from aggressive selling due to geopolitical uncertainty linked to U.S. President Donald Trump's efforts to end the Ukraine war.

Analysts said peace in Ukraine would ultimately support appetite for risk assets and consequently weigh on bond prices, which move inversely with yields. An end to the fighting could also lead to increased bond issuance, keeping pressure on prices, as Europe finances Ukraine's reconstruction.

Analysts were sceptical, however, regarding the prospects for quick progress after the White House said Friday's Alaska summit between Trump and Russian President Vladimir Putin would be "a listening exercise for the president".

Germany's 30-year government bond yield DE30YT=RR was down nearly 7 basis points at 3.23%, after rising 15 bps in the previous three sessions. It hit 3.3090% on Tuesday, its highest level since summer 2011.

Policy-sensitive German two-year yields DE2YT=RR were down 3 bps at 1.94%, while German 10-year yields DE10YT=RR - the euro area's benchmark - dropped 6 bps to 2.68%.

Analysts mentioned the Dutch pension reform, which is expected to reduce demand for long-dated bonds, and expectations for a massive increase in German fiscal spending as the main drivers of Tuesday's sell-off.

They expect a growing imbalance between bond demand and supply to weigh on prices.

Tuesday's move steepened curves across the euro area — a dynamic that occurs when long-dated yields rise faster than short-dated ones — reversing a flattening trend that had persisted almost uninterrupted since mid-July.

"We have been in the steepener camp, not just for the U.S., but globally," said Mohit Kumar, economist at Jefferies.

"In the U.S., the long end is unlikely to rally given credibility and fiscal concerns. In Europe, the long end would be under pressure," he added.

The gap between 2-year and 30-year German bond yields DE2DE30=RR tightened to 128 bps.

Tuesday's U.S. inflation data is expected to have little impact on the Federal Reserve's policy path, with markets still pricing in a more than 90% chance of a rate cut in September.

"We see little in the July consumer price report to push the Fed decisively toward a September rate cut. We look to the August payrolls release for the final word," said Andy Schneider, senior U.S. economist at BNP Paribas.

Italy’s 10-year yield IT10YT=RR was down 7 bps at 3.49%.