German bond yield holds near lows as Pyongyang unveils strike plan

LONDON - 10 August 2017: Europe's top-rated German bond yield held near six-week lows on Thursday as North Korea outlined detailed plans for a missile strike near the U.S. territory of Guam.

While an investor panic that followed a war of words between Washington and Pyongyang on Wednesday appeared to abate slightly, demand remained firm for assets that tend to perform well in times of market stress, including German Bunds.

Analysts said yields, which move inversely to prices, could fall further even as central bankers in the United States talked of a tightening in monetary conditions that could jack up global interest rates.

The yields on Germany's 10-year bond was a touch higher on the day at 0.44 percent, just above a low of 0.42 percent hit on Wednesday. U.S. and British equivalents were also trading a touch above Wednesday's six-week lows.

"We would currently be careful with a whiff of risk aversion in the air and, by extension, also stay away from shorts in the rates market," RBC's global macro strategist Peter Schaffrik said.

"Bund (yields) might well move towards the 20bp area (0.20 percent) again – particularly if risky assets start wobbling a bit."

After President Donald Trump told North Korea that any threat to the United States would be met with "fire and fury", Pyongyang on Thursday said it was finalising plans to fire four intermediate-range missiles over Japan to land 30-40 km (18-25 miles) from Guam.

North Korea regularly threatens to destroy the U.S, but Thursday's report was unusual in its detail, leading some to speculate that Pyongyang was giving advance notice of changes to its missile program rather than threatening an attack.

As tension in financial markets eased, analysts at Mizuho and ING said Wednesday's sharp moves had been caused by speculative trading in derivatives markets rather than actual trading in the underlying assets.

"We therefore expect this outperformance from the Bund to be susceptible to underperformance in the coming sessions, even if other 'risk off' measures stay unchanged," Mizuho's head of euro rates strategy Peter Chatwell said.

One factor that could push up yields back up again is any tightening in monetary conditions in the U.S., the world's largest economy.

Federal Reserve policymaker Charles Evans said on Wednesday that low inflation would not stop the central bank from beginning to shrink its $4.5 trillion balance sheet next month.