May 14, 2019 / 7:49 AM / 2 months ago

Investors shed European safe-haven bonds on trade talk hopes

* German Bund yields rise off six-week lows

* Trump delivers more conciliatory tone on China trade talks

* Italy to test appetite with big bond auction

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

LONDON, May 14 (Reuters) - European safe-haven government bond yields rose away from six-week lows on Tuesday helped by a more conciliatory tone in China-U.S. trade talks.

Investors had rushed for safety on Monday after China announced it would slap tariffs on U.S. goods in retaliation for the United States’ move last week to target more imports from China.

Italy, which saw its government bond yields hit a new 2-1/2 month high this week on risk aversion caused by the U.S.-China trade tensions and worries about political infighting in Rome, faces a big test of investor appetite for its debt with a bond auction later on Tuesday.

The prospect of trade conflict deepening between the world’s two biggest economies has rattled investors, but on Tuesday China’s top diplomat said China and the United States had the “ability and wisdom” to reach a trade deal that was good for both.

U.S. President Donald Trump said he thought talks in Beijing would be successful.

The 10-year German government bond yield rose 2 basis points to -0.057%, after hitting a six-week low of -0.07% on Monday.

Christian Lenk, an analyst at DZ Bank, described the market’s approach to the trade talks as “bipolar”, with investors struggling to decipher the situation and piling into German bunds on negative days - only to reverse those positions when the mood was more positive.

“That ping-pong feeling that markets are feeling with trade talks is something that’s likely to continue until we find some concrete results,” he said.

He said that the 10-year Bund yield was likely to remain stuck in negative territory for the time being as long as the trade tensions and concerns about euro zone economic growth persisted.

French government bonds have also been in demand this year - data showed on Tuesday that Japanese investors bought a record amount of French bonds in March as low domestic rates and the Federal Reserve’s dovish tilt fuelled demand for assets with relatively high yields and solid credit ratings.

The 10-year French government bond yield rose slightly on Tuesday to 0.342%, further away from 2-1/2 year lows touched in March.

Italian government bond yields rose marginally, just below 2-1/2 month lows touched this week. The 10-year yield rose 1 basis point to 2.669%.

Italy’s Treasury is offering up to 6.75 billion euros via three bonds maturing 2022, 2026 and 2049 at auction on Tuesday in what analysts say will be a test of investor appetite.

Italian bond yields have risen since a warning last week from the European Commission that public finances would deteriorate further and since politicians in Rome raised the possibility that Italy could breach EU rules on public spending.

Analysts said they expected public discord between the two ruling Italian parties to grow in the run-up to European elections later this month.

Reporting by Tommy Reggiori Wilkes; Editing by Kevin Liffey

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