(Corrects 2nd paragraph to show yields above, not below record lows)
* German bund heads back towards -0.4%
* Italian yields fall despite election talk
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Tommy Wilkes
LONDON, July 29 (Reuters) - Euro zone bond yields dipped on Monday as jittery investors eyed more U.S.-China trade talks and waited for a likely U.S. Federal Reserve interest rate cut, after the European Central Bank’s dovish signalling last week disappointed some.
Core euro zone yields are just above record lows hit last week after the ECB flagged another round of easing.
While yields then bounced higher as there was concern not all ECB policymakers were agreed on the timing of new stimulus, the bond rally resumed on Monday, including in Italy where easing hopes have outweighed uncertainty about a possible snap general election.
The Federal Reserve begins its two-day monetary policy meeting on Tuesday, with a 25 basis point cut fully priced in. Investors will be looking for whether the Fed signals that the rate is a one-off or the start of a rate-cutting cycle, as central banks look to fight signs of an economic downturn and lift inflation.
Sebastian Fellechner, a rates strategist at DZ Bank, said there was some risk aversion in financial markets on Monday as traders watched the latest round of U.S.-China trade negotiations. But “for European government bond markets, the most important thing is the anticipation of a QE (quantitative easing) programme. That will drive yields lower,” he added.
Fellechner thinks the ECB will signal more QE asset purchases in September, with another round starting before the end of 2019.
The benchmark German 10-year Bund yield fell more than 1 basis point to -0.3910%, not far from the record low of -0.422% touched last week.
French and Austrian yields were also lower.
Not everyone thinks the huge rally in bond markets in recent months in anticipation of ECB easing has further to run.
“With the ECB having laid down the broad scheme of action at last week’s meeting, recent lows in 10Y bund yields are not likely to be re-tested soon unless economic data show marked negative surprises,” Unicredit analysts said in a note.
“Hints that the road to a decision is still a long one are likely to negatively affect EGBs (European government bonds), with doubts about QE proving especially negative for BTPs (Italian government bonds).”
Italian bonds resumed their rally on Monday, however, with the 10-year bond yield falling 4 bps to 1.532%. Shorter-dated Italian yields also dropped.
Spanish bonds were in focus as the Socialist party sought to avoid a repeat election while at the same time ruling out a coalition deal with the far-left Podemos party.
Yields on Spanish debt fell between 2 and 4 bps in early trade. (Editing by Catherine Evans)