UPDATE 2-German bond yields hit 2-1/2 month low after dismal GDP data

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds German inflation, Trump tweet and chart, updates prices)

By Yoruk Bahceli

AMSTERDAM, July 30 (Reuters) – Safe-haven German government bond yields hit new 2-1/2 month lows on Thursday as the country’s economy showed a worse-than-expected, record contraction in the second quarter.

Investors are focusing on economic data after the U.S. Federal Reserve left interest rates near zero on Wednesday. Weak readings hit riskier assets like stocks with fears of a potential second wave of coronavirus infections which could put Western economies back in lockdown.

“Data is increasingly important now that the market has now come to terms with a second wave,” Mizuho analysts told clients.

The German economy contracted by 10.1% in the second quarter in its steepest plunge on record, worse than the 9% contraction predicted by Reuters economists and wiping out nearly 10 years of economic growth.

“The drop was even harsher, more pronounced than expected, which is something that is also being reflected by the market,” said DZ Bank strategist Daniel Lenz.

“There has been a lot of optimism in the spring with corona numbers going down and some early indicators going up. Now, with this very weak reading of German GDP numbers…(there is an) expectation that maybe some of the other European readings will be even worse,” he said, referring to the likes of Italy and Spain.

Germany’s 10-year yield fell to a new 2-1/2 month low of -0.55%, dropping further below the -0.50% level where it had found support in recent weeks. Yields were last down 5 basis points at -0.54%.

Yields were also pushed down by data showing German annual inflation came to a standstill in July.

On top of that, U.S. President Donald Trump on Thursday raised the possibility of delaying the nation’s Nov. 3 presidential election.

Political turbulence usually lends supports to low risk assets.

Lenz added that the increase in coronavirus infections and uncertainty around the agreement of a new stimulus plan in the U.S. were also supporting safe-haven bonds.

He said 10-year yields could fall to near -0.60%, a level last touched at the height of coronavirus market panic in mid-March, unless concerns eased.

Elsewhere, Italian 10-year yields fell to their lowest since early March at 1.036%, as the country sold five and ten-year bonds via auction.

They were last down 2.5 bps at 1.03%.

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