UPDATE 2-U.S. election uncertainty boosts euro zone bonds, German yields touch 8-mth lows

* Election uncertainty pushes down German 10-year yields

* Gap with 10-year Treasuries falls from March highs

* Portuguese 10-year yields fall to record low

* Germany sells second-ever green bond (Recasts to reflect Biden gains, updates prices)

AMSTERDAM, Nov 4 (Reuters) – German bond yields touched their lowest level since March on Wednesday and Portuguese yields plumbed record depths as uncertainty around the U.S. election outcome pushed investors to the safety of government debt.

Democratic candidate Joe Biden’s campaign said on Wednesday the former U.S. vice president was on track to win the 2020 election against President Donald Trump, with expected victories in Michigan, Wisconsin and Pennsylvania.

Yet, with a Democratic sweep off the cards, the perceived likelihood of a large new stimulus package – which is supportive of risk assets and negative for bonds – was seen as low.

U.S. Treasuries rallied sharply, and 10-year yields were down nearly 10 basis points at 0.78% at 1607 GMT. Germany’s 10-year bond yield, Europe’s safe-haven benchmark asset, had hit its lowest level since the coronavirus market rout in March at -0.671% in early trade. It gave up some of the falls and was trading at -0.63%, down 1.5 bps on the day, as the session drew to a close.

But moves were much less pronounced than in the United States and investors stressed that, beyond risk sentiment-driven shifts, they did not expect a major impact on European bonds from the election.

Bunds pared back gains in later trade, together with Treasuries, as stocks rose. The 10-year yield was last flat at -0.62%.

Daniel Morris, chief market strategist at BNP Paribas Asset Management, said he expected Bunds to continue trading with more stability than Treasuries in the coming days, as European bonds were driven mostly by lockdown restrictions in the region, expected to remain in place for several weeks, and support from the European Central Bank.

The gap between U.S. and German 10-year bond yields tightened to around 144 basis points as U.S. Treasury yields fell more than Germany’s.

The gap has widened in recent months as U.S. and European economic recovery diverged, touching 152 bps on Tuesday, the highest since March.

Riskier European government bonds also benefited from the broader demand for fixed-income assets, although less so than German bonds, with Portugal’s 10-year yield touching a record low of 0.055% before easing to 0.07% by the close.

Chris Iggo, chief investment officer of core investment at AXA Investment Managers, said Southern European bonds offered an attractive opportunity for investors demanding the safety of fixed-income assets.

“You get (a higher yield) than German bonds, for not quite the same credit risk, but not that much different,” he said, referring to the reduction in credit risk given the support available to countries like Italy from ECB bond-buying and the EU’s 800 billion euro recovery fund.

In the primary market, Germany sold its second-ever green bond at an auction, raising 4.6 billion euros via the five-year bond.

(For multimedia U.S. election coverage, click: here)

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