UPDATE 2-Flight-to-safety pushes German Bund yields to 1-month lows
* Portugal/Germany 10-year yield spread hits almost-four week high
* German yields fall on global politics, policy uncertainty
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Writes through)
By Dhara Ranasinghe and Abhinav Ramnarayan
LONDON, April 3 German government bond yields tumbled on Monday after a subway explosion in Russia's St. Petersburg, boosting demand for safe-haven bonds just as a reduction in ECB asset purchases kicked in.
At least nine people were killed and 20 injured in the blast in a St.Petersburg metro tunnel, and Interfax news agency said the cause may have been an explosive device hidden in a briefcase.
Caution before a meeting this week between U.S. President Donald Trump and his Chinese counterpart, Xi Jinping, after Trump comments about North Korea, and concern that the British overseas territory of Gibraltar was becoming an early source of Brexit tension added to a feeling it was best to start the second quarter holding high-quality German paper.
"There is a bit of a grab for safe havens at a time when investors are positioning more defensively towards risk assets," said Peter Chatwell, head of European rates at Mizuho.
Yields on German government bonds, regarded as among the safest assets in the world, fell 5-6 basis points.
Ten-year Bund yields hit a one-month low around 2.76 percent , while two-year yields were set for their biggest one-day fall since the day after Britain's referendum on membership of the European Union last June.
British gilt yields and U.S. Treasury yields also tumbled.
ECB SCALES BACK
With the European Central Bank's monthly asset purchases falling by 20 billion euros to 60 billion euros from April, analysts said the fall in Bund yields showed safe-haven bonds remained well supported even as the ECB steps back from its ultra-easy policy.
Still, lower-rated bond markets felt some pain from the reduction in ECB asset purchases.
Though policymakers last week stressed that rate rises are not on the cards in the near future, Italy and Portugal are seen as the biggest beneficiaries of stimulus and most vulnerable to any hints of policy tightening.
"We are now in the new environment of only 60 billion euros (of bond purchases), and though this was well telegraphed it seems to be negative for peripheral spreads," said Commerzbank strategist David Schnautz.
With manufacturing data in the euro zone hitting a six-year high in March, and factories across Europe and Asia posting solid growth for the month on Monday, the argument for "normal" monetary policy is growing, analysts said.
The yield gap between Portugal's 10-year government bond and the German equivalent hit an almost four-week high of 368 basis points, up 4 bps on the day.
Italy's 10-year borrowing cost gap over Germany hit 203 bps, its highest since March 24.
A broad fall in bond yields in late trade allowed yields in Portugal and Italy to pull back from their highs.
DZ Bank analysts say this divergence between higher and lower-rated countries within the bloc could continue as French presidential elections loom.
"As the first round of the French presidential elections will take place this month, reduced ECB purchases should lead not only to generally rising yields in the euro area, but also to wider cross-market spreads, which should weigh above all on the periphery and France," the analysts said in a note.
French and peripheral bond yields have risen in recent months on the outside chance that far-right leader Marine Le Pen wins the keys to the Elysee Palace and pushes for a French exit from the single currency.
(Editing by Hugh Lawson)