Bonds rose and yields fell on Thursday, bolstered by safe haven buying amid rising tension in the Middle East.

Equity markets were lower too, adding to the demand for bonds.

But rising oil prices may have helped cap the size of market moves as investors continued to debate whether the bigger danger came from the potential boost to inflation – bad for bond prices – or any damping effect on the economy, which could be good for bonds.

Treasuries trading was relatively quiet ahead of a $9bn auction in 10-year inflation-protected Tips due later on Thursday.

“This sale should do pretty well amid increasing concerns over rising inflation and some widening in Tips spreads,” said analysts at ActionEconomics.

By late afternoon in New York, the yield on the two-year Treasury was 5.124 per cent, down 5.9 basis points, while the 10-year note was at 5.075 per cent, down 3.1bp.

Eurozone government bond investors were helped by data showing slightly softer inflation in Germany and Francelast month. Good demand at an Italian bond auction added to the positive mood.

Italy re-opened two previous issues to sell €4bn in five- and 30-year paper. The 30-year sale saw the strongest appetite in six months.

”The Feb-37 series [30-year bonds] had cheapened a bit in the two sessions ahead of the sale, which also must have helped boost demand,” noted analysts at 4Cast.

The yield on Germany’s two-year Schatz was down 4.4bp at 3.568 per cent while the 10-year bund yield dropped 2.6bp to 4.044 per cent.

UK Gilts followed suit, leaving yields on two-year notes 2.6bp lower at 4.722 per cent and 10-year yields down 2.7bp at 4.636 per cent.

Japanese government bonds were bolstered by good demand for a 30-year auction as the market settled down ahead of the Bank of Japan’s decision on interest rates on Friday.

The bank is widely expected to raise rates for the first time since 2000, but there is debate in the market as to exactly how far they will go.

Investors lapped up Y600bn in long-dated bonds which were sold to yield a relatively high 2.56 per cent. The 10-year yield fell 2bp to 1.91 per cent.

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