By Abhinav Ramnarayan LONDON, June 19 : Euro zone government bond yields dropped across the board on Tuesday morning, tracking U.S. Treasury yields lower, as an escalating trade conflict between the United States and China fuelled demand for safe-haven assets.

U.S. President Donald Trump threatened on Monday to impose a 10 percent tariff on $200 billion of Chinese goods, prompting a swift warning of retaliation from Beijing.

This triggered an investor retreat into the better-rated government bonds of countries such as the United States and Germany, considered some of the safest and most liquid assets in the world.

“You only have to look at how far the main Shanghai index has fallen to see that people would probably want some safe-haven assets at this point,” said DZ Bank analyst Andy Cossor.

The Shanghai SE Composite Index was down 4.9 percent on Tuesday, its biggest one-day drop since February 2016.

U.S. Treasury yields, which move inversely to price, were down 4-5 basis points across the curve, with 10-year yields hitting a 2-1/2 week low of 2.866 percent in early trade.

Euro zone yields followed suit, and Germany’s 10-year government bond, the benchmark for the region, hit a two-week low of 0.363 percent.

Most other high-grade euro zone government bond yields were also 2-3 bps lower on the day.

Italian government bonds, which are considered less safe and have suffered from recent domestic political ructions, sold off: 10-year yields were up 3 bps at 2.59 percent and the spread over Germany widened to 227 bps.

“The trade issues have been bubbling away in the background — and Trump has certainly turned up the heat on that topic,” said Cossor of DZ Bank.

“If it were to develop into a more serious trade conflict, it could slow the pace of economic growth, we could see more demand for bonds.” Slower economic growth could prove an obstacle to plans by the world’s major central banks to end years of post-crisis stimulus.

The European Central Bank said only last week that it will end its 2.6 trillion euro quantitative easing programme by year-end and a potential trade conflict could make for a messy exit.

On Friday, Germany’s central bank slashed its growth forecast for this year and said trade and political concerns had made the outlook for the country’s still-booming economy more uncertain.

ECB President Mario Draghi is due to speak later today at a conference in Sintra, Portugal; his speech at this event in 2017 moved markets significantly as he prepared the ground for future policy tweaks.

This year, investors will be keeping an eye out for any signals on how a trade conflict may affect monetary policy.

Any news on a worsening German political situation could also affect the market, Commerzbank analysts said in a note.

German Chancellor Angela Merkel’s conservative Bavarian allies agreed to give her two weeks’ breathing space on Monday to find a European solution to a row over immigration that threatens to wreck her three-month-old coalition government.

/Reuters