* Bond yields edge lower but clear of two-year lows
* Strong U.S. jobs data ease fears about growth outlook
* But market still cautious, German data weak
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates pricing, adds quote)
By Dhara Ranasinghe
LONDON, Jan 7 (Reuters) - Most government bond yields in the euro area held above lows hit last week, in a sign that investors’ worst fears about the global growth outlook have abated for now.
Having fallen on concern about the outlook for the world economy in the first two trading days of 2019, European and U.S. bond yields jumped on Friday after data showed stronger-than-expected U.S. jobs growth in December and Federal Reserve chief Jerome Powell said the Fed will be patient and sensitive to market risks.
There was some support for euro zone bonds on Monday after European stock markets weakened as caution set in ahead of Chinese/U.S. trade talks. Still, the general tone was one of reflection after last week’s yield swings, analysts said.
In Germany, the euro zone’s benchmark bond issuer, 10-year bond yields rose one basis point as trading wound down to 0.217 percent - holding above more than two-year lows close to 0.15 percent hit last week.
“From a very short-term perspective, it’s not all complete doom and gloom, but at around 20 basis points, the Bund yield levels suggest there is a lot of scepticism about the economic outlook, and we have had weaker data from Germany again today,” said DZ Bank rates strategist Christian Lenk.
Data showed German industrial orders fell more than expected in November.
The market’s worst fears about the global economic outlook, which have led to aggressive repricing of the rates outlook, nevertheless appear to have subsided.
However, core euro zone bond yields struggled to find strong direction on Monday, dipping mid-morning before rising again in the afternoon.
Chris Scicluna, head of economic research at Daiwa Capital Markets, said the mixed economic data from Europe on Monday morning, as well as slowing U.S. services growth, meant there was considerable uncertainty as to the direction yields should be taking.
Money market futures in the euro zone pointed to a roughly 45 percent chance of a 10 basis point rate hike by the European Central Bank by the end of 2019, up from less than a 30 percent chance last week.
Most yields on higher-rated bonds in the bloc were slightly higher. France’s 10-year bond yields were three basis points higher at 0.73 percent.
That pushed the gap between French and German bond yields above the 50 bps barrier and its widest level since April 2017 .
French bonds have underperformed their German counterparts in recent weeks following violent street demonstrations in France that have prompted the government to raise public spending.
“The protests are definitely what got the move in the spread going in the first place, but there’s also supply dynamics coming into play,” said KBC rates strategist Mathias van der Jeugt.
The Netherlands, Austria, Germany, France and Italy are all expected to sell bonds soon, in what is expected to be one of the busiest auction weeks of the year.
Reporting by Dhara Ranasinghe; Additional reporting by Virginia Furness; Editing by Catherine Evans and Andrew Heavens