* German Bund yield inches up from over two-year lows
* Set for biggest weekly drop since Oct
* Euro zone flash inflation, US jobs data due out
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, Jan 4 (Reuters) - Long-dated German government bond yields rose from more than two-year lows on Friday as news of a new round of trade talks between the United States and China lifted sentiment in battered equity markets, denting demand for safe-haven bonds for now.
Still, in a sign of the pessimism gripping world markets at the start of a new year, German 10-year bond yields were set for their biggest weekly drop since October with a fall of around 7 basis points.
On Thursday, two-year U.S. Treasury yields fell below 2.4 percent to reach parity with the federal funds effective rate for the first time since 2008. That suggests investors doubt the U.S. central bank can continue to tighten monetary policy as its forecast implies.
Euro zone flash inflation numbers and the U.S. payrolls report for December out on Friday could provide further clues on the economic outlook.
Weak economic data and falling oil prices have weighed on investor inflation expectations. Investors in turn have scaled back expectations that the European Central Bank will raise interest rates.
Rates will remain low as long as needed to bring inflation back to the central bank’s 2 percent target, ECB policymaker Benoit Coeure said on Friday.
A key long-term market gauge of euro zone inflation expectations, the five-year, five-year inflation breakeven forward, is trading around 1.54 percent — its lowest since mid-2017.
Data on Friday showed French inflation eased more than expected in December to reach an eight-month low.
In early European trade, most 10-year bond yields in the euro zone were up to 2 basis points higher on the day.
Germany’s 10-year bond yield was up 2 bps at 0.17 percent — just off more than two-year lows hit on Thursday at 0.146 percent.
“Levels below 30 or 20 bps suggest a risk of a crisis or that we are already in crisis mode,” said DZ Bank rates strategist Daniel Lenz, referring to German Bund yields.
“Exaggerated or not, investors are concerned about the economic outlook given the trade disputes, worries about a U.S. shutdown, weak data and falling inflation expectations.”
In Italy, the bond market recovered some ground after a selloff on Thursday amid worries over struggling Italian lender Banca Carige.
Italian 10-year bond yields were last down 5 bps on the day at 2.83 percent.
Reporting by Dhara Ranasinghe, editing by Larry King