* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Virginia Furness
LONDON, Dec 5 (Reuters) - Germany’s 10-year government bond yield fell to its lowest in over six months on Wednesday, feeling the effect of a flattening U.S. curve that is stoking fears of an economic downturn.
Risk sentiment is also being hurt by waning optimism over U.S. China trade talks and a series of setbacks over Brexit, all of which have combined to halt Monday’s global rally, which was driven by optimism over trade.
The gap between Germany’s two-year and 10-year bond yields narrowed further to 85.70 basis points, the tightest in 17 months, after parts of the U.S. Treasury yield curve inverted for the first time in over a decade, hinting at recessionary expectations.
European equities opened around 1 percent lower while the bid for safe-haven assets pushed Germany’s 10-year government bond yield, the benchmark for the region, to its lowest in six months at 0.247 percent.
“There has been a huge flight to safety in the European bond market, but equities closed on Tuesday only modestly lower while there were sharp falls in the U.S.,” said Martin van Vliet, senior rates strategist at ING. “The European bond market was already preparing for trouble ahead.”
Other high-grade euro zone government bond yields were also around one basis point lower,.
More turmoil on the Brexit front is likely, after British Prime Minister Theresa May’s government was found in contempt of parliament and then a group of her own Conservative Party lawmakers won a challenge to hand more power to the House of Commons if her deal is voted down.
U.S. equity futures were firmer after China expressed confidence on Wednesday that it can reach a trade deal with the United States. However, U.S. President Donald Trump warned that he would revert to more tariffs if the two sides cannot resolve their differences.
U.S. markets are closed for a day of mourning for former president George H. W. Bush, providing a welcome pause in the selloff.
ITALY HOLDS DESPITE TRIA RUMOUR Italian government bond yields slipped two to three basis points, despite reports by Corriere della Sera that Economy Minister Giovanni Tria is considering resigning once parliament approves the 2019 budget.
European Commissioner Guenther Oettinger looked to add further pressure on Italy to lower its proposed budget deficit for 2019. He said even a deficit goal of 2.2 percent of gross domestic product “would be against all the commitments”.
Tria said on Tuesday the government was weighing additional asset sales next year to cut debt, as it seeks to settle a dispute with the European Commission over the budget.
Italy’s 10-year government bond yield opened three bps points lower at 3.12 percent. Its spread over higher-rated Germany tightened two bps at 286 basis points . (Reporting by Virginia Furness, editing by Larry King)