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UPDATE 2-Stellar euro zone bond rally takes a breather

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 gov't bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices)

LONDON, May 30 (Reuters) - A rally in euro zone government bond markets paused for breath 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 held near the lows touched on Wednesday as Chinese newspapers warned of a retaliation against the United States in the ongoing trade dispute.

Yields on 10-year German bonds, regarded as one of the safest assets in the world, rose slightly to minus 0.168%. That's still close to a record low of -0.204% set in July 2016, shortly after Britain voted to leave the European Union.

"The global picture has not changed and today is just a bit of profit taking on bond gains ahead of month-end," said Pooja Kumra, European rates strategist at TD Securities.

"Even though data has started to improve, the global outlook has not and focus is turning to the ECB's meeting next week."

Spanish and Portuguese 10-year bonds yields briefly touched fresh record lows . Dutch 10-year bond yields, at just 0.024% remained the next candidate to push into negative territory.

A holiday in parts of Europe added to subdued trading, analysts said.

U.S. Treasury yields, which have driven the global bond market moves this week, were also higher and off 20-month lows for now.

That slide in U.S. yields alongside an inversion of the yield curve, as measured by the gap between three-month and 10-year bond yields, reflects rising recession fears and expectations for a U.S. rate cut.

Benjamin Schroeder, senior rates strategist at ING, noted the drop in 10-year U.S. Treasury yields this week below 2.22%, taking it briefly below the Federal Reserve's key interest rate.

"Trading through Fed funds has typically been followed by a Fed cut being the next move later," he said in a briefing note.

Schroeder added that the increasing trade tensions, Brexit and political concerns in Europe would continue to hold sway: "As none of these issues look likely to be resolved near-term it is hard to see a break to the trend."

There was some focus on Thursday on Portugal, which began book-building for its debut Chinese yuan-denominated Panda bond. .

Analysts said they expected strong demand given positive sentiment on the sovereign following Fitch Ratings' decision last week to revise its to positive from stable.

(Reporting by Dhara Ranasinghe Editing by Larry King, Helen Popper and Kirsten Donovan)