* Germany 10-year bond holds close to recent lows
* Germany sells 1.7 billion euros of 10 year bonds
* Italian bond yields drop as budget dispute rumbles on
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, updates prices)
By Virginia Furness
LONDON, Nov 28 (Reuters) - Core euro zone bond yields held close to recent lows on Wednesday as investors stuck to safe-haven assets even though hopes for a cooling of the China-U.S. trade dispute improved sentiment towards equities.
Germany’s 10-year government bond yield, the benchmark for the region, edged up marginally to 0.353 percent, even as global equity markets were bolstered by hopes that Washington and Beijing would broker a trade deal.
World shares rose to one-week highs on Wednesday as White House adviser Larry Kudlow held open the possibility of a deal at the weekend even though he said the U.S. side was disappointed by China’s response so far. The G-20 summit will start on Friday.
Commerzbank strategist Christoph Rieger said he expected Germany’s Bund yield to hold lower towards the end of the year as investors look to reduce risk exposure.
“It is noteworthy how well supported Bunds are with the downside correction rather modest even when equities are up,” he said. “Lots of market participants are keen to go into year end not too exposed to the huge risks which are coming in multiple directions.”
One of those risks is the passage of the UK’s Brexit agreement, which was sealed with EU leaders on Sunday, but looks to face opposition in parliament, leaving open the possibility of a no-deal Brexit.
“After the last weekend, it is one of the main political factors everyone is looking at,” said Christian Lenk, rates strategist at DZ Bank. “In the two weeks to come this will be a major focus.”
Other high quality euro zone government bond yields were unchanged on the day .
Germany sold 1.683 billion euros in a top up of its 0.25 percent, 10-year Bund at the lowest price of 99.18, the Bundesbank said on Wednesday.
Investors will also be looking for any signs that the U.S. Federal Reserve may consider a pause in plans to raise interest rates when Fed Chair Jerome Powell speaks later on Wednesday.
In the euro zone, sources told Reuters that ECB policymakers are leaning towards making only nuanced changes to how the bank reinvests cash from maturing bonds, including keeping the purchases open-ended.
With quantitative easing coming to a gradual end, investors are eagerly awaiting the bank’s policy on reinvestments.
In Italy, government bond yields proved resilient to the latest developments over Rome’s contentious budget.
Italian Prime Minister Giuseppe Conte said on Wednesday that there should be room to adjust the final budget numbers after a cost review of the measures in the spending package is completed.
That followed comments from EU commissioner Valdis Dombrovskis to German daily Handelsblatt and Italy’s La Stampa that a “substantial correction” was needed in Italy’s draft budget for 2019.
“The Dombrovskis news underlines how far apart they (the EU, and Italy’s government) are in terms of the deficit procedure,” Commerzbank’s Rieger said. “But BTP spreads have become somewhat numb to some of the risks now.”
Italy’s 10-year government bond yield was last seen at 3.26 percent, three basis points lower on the day, while its spread over higher rated Germany held comfortably below 300 bps at 290 bps.
Italy’s government is looking to make concessions to its budget in order to avoid disciplinary action by the European Commission.
EU government representatives are set on Thursday to back European Commision disciplinary proceedings against Italy over its expansionary budget. (Additional reporting by Tommy Wilkes Editing by Andrew Heavens/Peter Graff/Jane Merriman)