Bund yields head for steepest monthly drop since April as flight to safety gathers pace

LONDON, Feb 27 (Reuters) - Germany's 10-year yield was set on Friday for its biggest monthly drop since last April's tariff turmoil, as government bonds globally benefit from investor anxiety over artificial intelligence and geopolitical tensions.

A burst of AI-driven investment has prompted investors to reassess both the durability of the spending spree and the scale of disruption the technology could unleash on labour markets.

The reassessment has cooled risk appetite and triggered a flight to safe-haven assets such as government bonds.

Bond yields move inversely to prices.

The yield on 10-year Bunds, the euro zone benchmark, dipped 1.5 basis points to 2.69% and was on course to finish the month roughly 16 bps lower. DE10YT=RR

"Capital flows are shifting to Europe and European debt is emerging as a transitory safe asset," said Ludovic Subran, chief economist at Allianz Investment Management.

"Global investors are increasingly using Europe, and particularly core markets like the German Bund, as a global safe asset substitute."

Investors are also tracking developments in the U.S.-Iran standoff. Talks on the longstanding nuclear dispute ended on Thursday without a breakthrough, though there were some signs of progress, according to mediating country Oman.

INFLATION DATA IN THE SPOTLIGHT

European Central Bank President Christine Lagarde said earlier this week that policymakers expect inflation to settle near their 2% target in the medium term.

Data released on Friday showed that inflation eased in several German states in February, while preliminary figures showed consumer prices in France rising more than expected, underscoring that the disinflation trend could be uneven across the bloc.

"This does not, however, signal a marked resurgence in inflationary pressures," said ING's senior economist Charlotte de Montpellier.

"France should therefore continue to be among the countries with the lowest inflation rates in the euro area."

The yield on France's 10-year OAT government bond was a touch lower at 3.25%, marking the sixth consecutive day of declines and hovering at its lowest since July. FR10YT=RR

The gap between French and German yields DE10FR10=RR was 56.2 bps on Friday. It has shrunk in recent weeks after climbing to 71.6 bps in January.

Separately, the ECB's monthly survey showed euro zone consumers trimmed their inflation expectations last month.

The central bank is expected to hold rates at least through the end of the year, according to a Reuters poll of economists earlier this month.

The German two-year yield DE2YT=RR, which is more sensitive to interest-rate expectations, was 2 bps lower at 2.02%.