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Euro zone bond rally pauses, record low yields remain within grasp

Dhara Ranasinghe

* Bond yields rise, keep record lows in sight

* Risk sentiment recovers, stocks higher

* Portugal starts book building for first Panda bond

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

LONDON, May 30 (Reuters) - A rally by euro zone government bonds paused on Thursday, with German yields rising for the first time in four days but keeping record lows in sight against a backdrop of heightened global uncertainty.

An increasingly bitter U.S.-China trade war has exacerbated concern about global growth, and along with worries about a clash between Italy and the European Union over Rome's fiscal stance has accelerated a rush into safe-haven bonds this week.

Ten-year bond yields across the euro zone edged up on Thursday but remained near the lows reached on Wednesday, when investors were rattled by reports that China was ready to hit back against the United States with restrictions on rare earths.

Yields on 10-year German bonds, regarded as one of the safest assets in the world, rose two basis points to minus 0.16%. That's still about four bps from record lows set in July 2016, shortly after Britain voted to leave the European Union.

Spanish and Portuguese 10-year bonds yields held just off Wednesday's record lows . Dutch 10-year bond yields, at just 0.03%, remained close to 0%.

U.S. Treasury yields were also higher on Thursday, moving off 20-month lows for now. The slide in U.S. yields also reflects rising expectations the Federal Reserve will cut U.S. interest rates.

"The momentum that we've seen building in the U.S. in terms of rate cuts has also spilled over into the euro zone," said Rabobank rate strategist Matt Cairns. A holiday in parts of Europe added to subdued trading, he said.

Elsewhere, there was some focus on Portugal, which began book-building for its debut Chinese yuan-denominated Panda bond. . Some calm also returned to Italian bond markets after sharp moves this week.

The European Commission wrote on Wednesday to the Italian government asking it to explain a deterioration in the country's public finances, a move that sets the stage for a possible legal clash with the eurosceptic coalition in Rome.

(Reporting by Dhara Ranasinghe, editing by Larry King)