* German Bund yield touches -0.172%
* Still down around 42 bps this year
* Most euro zone yields set for biggest annual fall since 2014
* World bond yields at the end of 2019: tmsnrt.rs/2sRd4Qy (Updates with moves in USTs, Bund curve, adds China story)
By Dhara Ranasinghe
LONDON, Dec 30 (Reuters) - Germany’s 10-year bond yield rose to a seven-month high on Monday as optimism about U.S.-Chinese trade relations and the global growth outlook put bond markets on the back foot as a stunning year drew to a close.
Bond yields, which move in the opposite direction to the price, have risen since September as U.S.-Chinese trade tensions and Brexit worries ebbed, while data suggested the worst may be over for the world economy.
Having slid sharply in 2019 amid trade disputes, recession fears and central bank easing, bond yields are not expected to have a repeat performance in 2020.
Indeed, Germany’s 10-year yield rose as high as -0.172% on Monday. The South China Morning Post reported that Chinese Vice Premier Liu He will visit Washington this week to sign a Phase 1 trade deal with the United States, lifting investor sentiment.
The German yield curve was at its steepest since July , while most 10-year euro zone bond yields were 7-8 bps higher on the day - the biggest daily jump in four weeks.
Market moves were, however, exacerbated by holiday-thinned trade, analysts said. Euro zone bond markets are closed on Tuesday for New Year’s Eve.
German, Dutch, and French yields were poised for their biggest annual declines in five years , having tumbled 43-60 bps. U.S. Treasury yields, also set for their biggest annual yield falls since 2014, were sharply higher.
“The idea is the main bearish force for bonds is an improving growth outlook that tends to drive some rotation from fixed income to riskier markets,” said John Normand, head of Cross-Asset Fundamental Strategy at J.P. Morgan, adding there were two big anchors for bonds markets.
“One is the negative cash rate environment in Europe and Japan, which is not going to change and related to that is the very dovish Fed environment ... The other anchor is the scarcity created by very large central bank balance sheets and the persistence of QE (quantitative easing) in Europe.”
The Federal Reserve has cut rates three times this year. The European Central Bank lowered its deposit rate in September and announced the return of asset purchases.
China’s central bank at the weekend announced a measure that would help lower borrowing costs and boost economic growth. .
Some analysts argue that with the U.S.-China trade conflict far from over, demand for safe-haven bonds will remain.
Year-end 2020 forecasts for German bond yields vary, highlighting the breadth of views on the economic outlook.
“Bond markets do not appear classically good value to me, but then I said that 12 months ago,” said Chris Bailey, European Strategist at Raymond James.
“There is much to think about in terms of fixed income markets in 2020. It could be a big/influential year and certainly decade - will there be a regime shift versus the world (for the first time) since 1982?”
Some analysts were bearish on Italy, one of the few developed bond markets to offer investors positive yields this year. More than half of the euro zone government bond market remains in negative-yield territory.
Italian 10-year bond yields have tumbled 135 bps this year to 1.42%; Greek yields have slid 290 bps to 1.48%.
“We see Italian BTPs underperforming versus the German Bund and Spanish Bonos as euro zone economic stagnation continues in spite of U.S positivity through Q1,” said Henry Occleston, a rates strategist at Mizuho.
Reporting by Dhara Ranasinghe; Additional reporting by Tom Arnold; Editing by William Maclean and Mark Heinrich