January 14, 2019 / 11:51 AM / 6 months ago

UPDATE 2-Weak China data, looming Brexit deal vote, push euro zone yields lower

* Bunds yields fall 3 bps on plethora of risks

* German tax cuts mooted at caucus meeting

* Looming Brexit vote adds to risk aversion (Rewrites top to reflect market moves, adds Italy syndication details, updates prices)

By Virginia Furness

LONDON, Jan 14 (Reuters) - Euro zone bond yields dipped on Monday as weak Chinese data and a looming vote in Britain’s parliament on Prime Minister Theresa May’s Brexit deal kept investors nervous.

However, supporting comments from President Donald Trump on the prospects for U.S.-China trade talks helped restrain demand for safe-haven assets.

Concerns about the German economy and the continuing government shutdown in the United States, as well as the threat of a snap election in Greece, had all rattled investors’ confidence in early trade.

Asian and European shares led Monday’s declines after data showed Chinese exports in December had unexpectedly posted their biggest fall in two years.

For an interactive version of the below chart, click here tmsnrt.rs/2SRopIf.

But as the session wore on, some optimism returned to the markets, undercutting the demand for safe government bonds, particularly after Trump predicted the United States would reach a deal with China to end a tit-for-tat trade war.

Having dropped in early trade, 10-year U.S. Treasury yields were flat on the day at 2.70 percent in U.S. trading. .

Accordingly, German 10-year yields, which had dipped to 0.20 percent, was back at 0.23 percent by 1600 GMT, down just a basis point on the day.

“I think it’s fair to say sentiment has steadied a little bit now, but a lot of risks still remain and safe haven bond markets remain bid,” said Rabobank strategist Richard McGuire.

“We’re not in a celebratory mood, just less gloomy than we were this morning.”

Data on Monday showed euro zone industrial output fell in November by more than expected.

German data has disappointed of late, pointing to a slowdown in economic growth which ECB policymaker Ewald Nowotny said on Saturday could be a lasting phenomenon caused by structural problems, particularly in its car industry, rather than a one-off.

The future path of Britain’s exit from the European Union is an additional uncertainty as parliament appears likely to vote down May’s withdrawal agreement on Tuesday. Possible outcomes include a last-minute deal, a disorderly exit, a new referendum or remaining in the bloc.

Italy, meanwhile, said on Monday it had hired Barclays, Citigroup, HSBC, JP Morgan and UniCredit to sell a new benchmark BTP bond with a 15-year maturity.

Italian bonds drew demand across the curve ahead of this deal, with short-dated yields 5-6 bps lower, while 10-year yields dropped 2 bps to 2.84 percent

The closely-watched Italy/Germany 10-year bond yield spread was marginally tighter on the day at 260 bps.

GREEK WORRIES

The threat of an early election in Greece kept upward pressure on its bond yields. The 10-year government bond yield was two bps higher at 4.30 percent, though suggestions that Greek Prime Minister Alexis Tsipras would win a confidence vote set for Wednesday kept a cap on yields.

Greece is expected to bring a new syndication to market soon but further political uncertainty and any rise in yields could skewer its chances of a new deal in the short term.

Reporting by Virginia Furness; additional reporting by Thomas Escritt in Berlin and Abhinav Ramnarayan in London; Editing by Gareth Jones

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