Safe-haven German Bund yields dipped below 0.20 percent for the first time in more than five weeks on Tuesday after the United States said it may authorise more strikes on Syria in a move that has escalated tensions with Russia.
Across global markets, assets seen as low risk such as highly-rated debt, gold and stable currencies like the Japanese yen were in demand, while stocks fell.
The United States and its allies blame Syrian President Bashar al-Assad for a poison gas attack that killed 87 people a week ago. The Syrian government denies blame.
After its cruise missile strike on a Syrian air base last week, the White House said on Monday it was ready to retaliate again if the Syrian government uses chemical weapons or deploys barrel bombs in the country.
The intervention has put U.S. President Donald Trump’s administration in open conflict with Russian President Vladimir Putin, who has stood firmly by Assad.
U.S. Secretary of State Rex Tillerson carried a unified message from world powers to Moscow on Tuesday, denouncing Russian support for Assad. Some countries are proposing further sanctions on Moscow.
“Market moves generally fit with the theme of a moderate risk-off tone amidst on-going geopolitical concerns,” RBC’s global macro strategist Peter Schaffrik said.
Analysts said European markets were also reeling from the race for the French presidency, as far-left candidate Jean-Luc Melenchon climbs into contention.
Opinion polls have shown Melenchon – who, like far right Marine Le Pen, wants a referendum on EU membership – surging in recent days, with an Ifop survey on Tuesday putting him in third place ahead of conservative Francois Fillon for the first round of voting later this month.
Japanese bank Nomura said on Tuesday it would enter an “outright short” position to bet against French government bonds if Melenchon were to face Le Pen in May’s presidential run-off.
Japanese investors dumped a record amount of French bonds in February, data from Japan’s Ministry of Finance showed on Monday.
German 10-year bond yields dropped around 3 basis points to 0.192 percent on Tuesday, the lowest since Feb 27.
French equivalents rose as much as 5 bps to a one-week high of 0.985 percent, stretching the gap between the benchmarks to its widest in six weeks.
Yields on low-rated bonds of southern European countries like Italy and Portugal also rose as investors ditched riskier assets.
In primary markets, the Netherlands sold just under 1 billion euros of a 16-year bond while Austria is selling a new 10-year bond via a group of banks.
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