November 5, 2019 / 8:13 AM / 14 days ago

Euro zone bond yields higher as trade optimism knocks safe havens

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Nov 5 (Reuters) - Government bond yields across the euro area rose on Tuesday, heading towards 3-1/2 month highs on optimism that U.S.-China trade talks will lead to a de-escalation in tensions between the world’s two biggest economies.

China is pushing U.S. President Donald Trump to remove more tariffs imposed in September as part of a “phase one” U.S.-China trade deal, people familiar with the negotiations said on Monday.

The deal, which may be signed later this month by Trump and Chinese President Xi Jinping at a yet-to-be determined location, is widely expected to include a U.S. pledge to scrap tariffs scheduled for Dec. 15 on about $156 billion worth of Chinese imports, including cell phones, laptop computers and toys.

Growing optimism over the trade talks has boosted stock markets globally, undermining demand for safe assets such as U.S. Treasuries and German government debt.

Germany’s 10-year Bund yield rose 2.5 basis points to -0.32 -0.32%, nearing its highest levels in around 3-1/2 months.

Most other 10-year euro zone bond yields were 2-3 bps higher on the day, while U.S. Treasury yields rose 3 bps to 1.82% .

“There’s no central bank action until December so the trade war talks are the main theme,” said Pooja Kumra, European rates strategist at TD Securities in London. “And so far there has been nothing negative.”

Analysts said fresh bond supply from the United States and Europe added to upward pressure on yields. Austria is scheduled to sell five and 10-year bonds later this session.

Spain, which holds an election on Sunday, was also moving into focus.

On Monday, the main candidates to become Spain’s next prime minister clashed over how to handle Catalan separatism, as they tried to woo voters ahead of a repeat election that opinion polls show could be as inconclusive as the one in April.

The closely-watched gap between Spanish and German 10-year bond yields on Monday widened to around 67 bps, its highest level since mid-October — suggesting some unease among investors as Sunday’s election draws closer.

“An election should add uncertainty as to the future trajectory, in turn pushing forward spreads wider,” analysts at Mizuho said in a note.

Reporting by Dhara Ranasinghe; Editing by Catherine Evans

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