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Euro zone govt bond yields fall on Turkish tumult

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·2-min read
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LONDON (Reuters) - Euro zone government bond yields fell on Monday as a plunge in the Turkish lira boosted demand for safer assets, while investors awaited the latest data on whether the European Central Bank had begun accelerating its bond purchases.

President Tayyip Erdogan shocked markets by replacing Turkey's hawkish central bank governor with a critic of high interest rates, sparking a selloff in stocks, talk about possible capital controls and a dash for safer assets such as government debt.

By 0820 GMT, the benchmark 10-year German government bond yield was down 3 basis points at -0.322%.

Other core euro zone bond yields were down by a similar margin, while peripheral euro zone yields by slightly less.

German bond yields already fell on Friday as concerns about the growth outlook in the euro area following a spike in COVID-19 cases encouraged investors to bet that the ECB will want to keep rates as low as possible.

The past month has seen a dramatic selloff in the United States government bond market, sparked by worries about rising inflation as the U.S. economy rebounds.

But euro zone government bond markets, after initially selling off too, have remained resilient.

"Going forward, we think that Bund outperformance relative to USTs [U.S. Treasuries] will continue, even if today’s data on ECB weekly purchases do not indicate an acceleration. Indeed, the economic outlook in the US looks more favourable than in the eurozone," UniCredit analysts said in a research note.

They added that they expect the ECB will be "more supportive of EGBs [euro zone government bonds] than the Fed is of USTs."

The ECB weekly purchase data covers the period from 11 to 17 March and comes after ECB chief Christine Lagarde signalled faster money-printing to keep a lid on euro zone borrowing costs on March 11.

The U.S. 10-year Treasury yield dropped 5 basis points to 1.676% in early European trading as investors fretted about the fallout from the plunge in the Turkish lira.

The U.S. 10-year yield had last week shot up to above 1.75%, its highest since January 2020.

(Reporting by Saikat Chatterjee; Editing by Raissa Kasolowsky)