November 1, 2018 / 11:36 AM / a year ago

UPDATE 2-Euro zone bond yields rise as risk appetite revives

* German Bund yields near one-week high

* Stronger risk sentiment pushes yields higher

* European shares hit two-week peak

* Libor rises to highest since March 2008

* Euro zone periphery govt bond yields (Updates pricing, adds detail on Libor rate)

By Dhara Ranasinghe

LONDON, Nov 1 (Reuters) - Euro zone government bond yields rose on Thursday, with German borrowing costs hitting a one-week high as rallying stocks and upbeat noises on Brexit talks dimmed the appeal of fixed income assets.

Sterling jumped more than one percent against the dollar after reports that a deal is nearly done that would give UK-based financial firms some form of access to European markets when Britain leaves the European Union.

Although the British government and European officials later played down the chance of an imminent deal, the initial news, together with a firm start to November for equity markets after a plunge in October, continued to affect bond markets.

“The news on a potential deal on financial services in Brexit talks tallies with the better risk on mood in equities,” said Martin van Vliet, senior rates strategist at ING.

Across the euro zone, most 10-year bond yields were up 1-2 basis points on the day.

Germany’s benchmark 10-year bond yield rose to a session high of 0.42 percent, its highest in just over a week and eight bps above seven-week lows hit last week at the height of a selloff in world stocks, before receding slightly to 0.41 percent. October was the worst month for European stock markets since January 2016.

European shares hit a two-week high on Thursday thanks to strong earnings results from Dutch bank ING and UK phone group BT.

Italian bond yields, which tend to move closely in step with rises and falls in risk sentiment, fell.

Dialogue between Italy and the European Commission over the country’s budget plans will not be an “exchange of concessions”, Prime Minister Giuseppe Conte told Corriere della Sera in an interview published on Thursday.

Analysts said that having benefited from month-end demand and heavy bond redemptions this week, euro zone debt markets were now more vulnerable to other factors such as a pick-up in risk sentiment and the upward pull from U.S. Treasury yields.

U.S. bond yields remained within three basis points of the one-week highs they hit on Thursday, as Wall Street shares put in a strong performance and economic data pointed to further signs of strength in the labour market..

“There is a bit of profit-taking on long positions in euro zone bonds,” said René Albrecht, rates strategist at DZ Bank.

“There isn’t much space for lower or deeper bond yields - inflation is returning and the ECB is ending its asset purchases.”

Expectations of rate hikes in the United States helped push up the London interbank offered rate (Libor) significantly.

The Libor rate to borrow three-month dollars rose 2.3 basis points to 2.5815 percent, the highest since October 2008. That was the biggest daily increase since a near-2.6 basis points rise on March 20.

Reporting by Dhara Ranasinghe; Additional reporting by Virginia Furness; Editing by Peter Graff and Andrew Roche

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