LONDON, Nov 17 - Two-year euro zone government bond yields fell to a two-month nadir and led other yields lower on Monday after geopolitical risks returned to rock equities and boost the safe haven allure of fixed income assets. Stocks in major Asian bourses such as Tokyo and Hong Kong, and euro zone bourses <.STOXX50E>, fell sharply on Monday. Japan's Nikkei stock average <.N225> ended down almost four percent, undermined by fears about the naming of Japan as a possible target in an al Qaeda statement and after disappointing corporate results helped dent U.S. stocks on Friday. "Terror has not gone away for the world's security and remains a key factor in pricing bonds at this time," said a trader in London.
"There is also evidence of end of year buying which will support flows into bonds until the December lull." At 1218 GMT, yields on highly-liquid two-year Schatz notes were down 6.2 basis points at 2.611 percent, having earlier hit 2.60 percent - its lowest since October 15. Ten-year Bund yields were down 4.6 basis points at 4.322 percent. The terror fears were sparked by a report by London-based Arab-language newspaper al-Quds al-Arabi. It said Osama bin Laden's al Qaeda network was planning car bombings against the United States and its allies, including Japan. There were fears al Qaeda was already at work again after the Arabic publication said a division of al Qaeda had claimed responsibility for Saturday's bombing of two synagogues in the Turkish city of Istanbul that killed 23 people. There was a dearth of euro zone or major U.S. data on Monday, keeping geopolitical factors at centre stage for bonds. But attention could turn to the U.S. New York Empire State manufacturing survey for November at 1330 GMT. In October, the survey jumped to 33.7, suggesting a pick up in economic activity, and sent yields rising sharply in Europe and the United States. The December Bund future was up 36 ticks on the day at 112.92. "We are extending last week's recovery and now reach an important resistance range of 112.85 to 113.20. The level 113.20 is the October 20 session high," said Richard Adcock, technical analyst at UBS Warburg in London. The December Euribor futures contract , a gauge of short-term euro zone interest rate expectations, was up one basis point at 97.835, implying three-month money rates at 2.16 percent. The European Central Bank's key rate is at 2.0 percent. The euro rose above $1.18, exceeding levels seen late in European trading on Friday, and provided a further boost to bonds.
Bunds were steady against U.S. Treasuries, with the 10-year yield spread unchanged, such that T-Notes yielded eight basis points less than German debt. Yields in both markets were down on Monday. The euro swap spread was steady at 10 basis points.//