Benchmark Bund yield hits 2-1/2-month low on US-China trade tensions

Oct 14 (Reuters) - Euro zone government bond yields hit fresh multi-week lows on Tuesday, as investors kept a close eye on U.S.-China trade tensions and France’s ongoing political stalemate.

Investors fretted over the potential economic fallout from uncertainty following commercial disputes, which could cloud corporate decision-making and delay investment planning.

However, U.S. President Donald Trump remained on track to meet Chinese leader Xi Jinping in South Korea in late October as both sides looked to ease tensions following fresh tariff threats and export controls.

French Prime Minister Sebastien Lecornu faces two possible no-confidence votes, and it was unclear if he had the votes to survive to the end of the week.

Germany’s 10-year Bund yields, the bloc’s benchmark, fell 3 basis points (bps) to 2.60%, after hitting 2.597%, its lowest since July 23.

U.S. Treasury yields fell in early London trading with the 10-year US10YT=RR down 3 bps at 4.02%. The U.S. bond market was closed on Monday for Columbus Day.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for European Central Bank policy rates, dropped 2 bps to 1.92%.

Money markets priced in about a 70% chance of a 25-basis-point European Central Bank rate cut by July EURESTECBM7X8=ICAP, up from around 65% the day before. The ECB depo rate is seen at 1.90% in February 2027 EURESTECBM11X12=ICAP from the current 2%.

The yield gap between safe-haven Bunds and 10-year French government bonds DE10FR10=RR — a market gauge of the risk premium investors demand to hold French debt — was at 83.50 bps. It hit 87.96 bps, the highest since January 13 on concerns about the French fiscal outlook.

France 10-year yields FR10YT=RR were down 2 bps at 3.444%, their lowest since September 8.

Investors see no clear catalyst for further widening in French spreads in the absence of new elections.