Bund yields fall as focus switches to US presidential showdown

LONDON: Safe-haven German bond yields fell to their lowest in more than two weeks on Monday as attention turned from central banks to the first televised debate between the US presidential candidates later in the day.

Polls indicate a tightening race between Democrat Hillary Clinton and Republican Donald Trump in a vote shaping up as a significant risk event for financial markets.

"We are heading into the presidential debate with a positive bias in European bond markets," said KBC strategist Piet Lammens. "The US debate is positive from a safe-haven stance but it could also be negative if the candidates point to a more aggressive fiscal stance."

Bund yields fell by nearly 4 basis points to around minus 0.12 percent, their lowest in more than two weeks. They closed on Friday with the biggest weekly fall since late July.

Analysts said that Monday's presidential debate could push US bond yields higher if the candidates suggest they would increase expenditure or cut taxes, which would increase the federal deficit and borrowing.

"Bond markets are likely to view any Trump gains in this debate as putting upward pressure on yields as his fiscal plans are more aggressive," said Martin Van Vliet, senior rates strategist at ING. Most other euro zone bond yields were 3-4 bps lower on the day.

Data showing German business morale rose far more than expected in September, reaching its highest level in more than two years, did not exert any upward pressure on yields.

The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of 7,000 businesses, rose to 109.5 from an upwardly revised 106.3 in August, the biggest monthly increase since July 2010.

European Central Bank President Mario Draghi said the euro zone economy is coping well with global uncertainty, such as Britain's vote to leave the European Union, even if the outlook for external demand has worsened.

Appetite is low for a big ECB policy shift, so any change is likely to be only an adjustment of the current asset-buying programme rather than a significant overhaul, ECB and central bank sources have told Reuters.