Wires

UPDATE 1-Euro zone yields down slightly, Portuguese bonds outperform

Olga Cotaga

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices, adds context on Fed)

LONDON, Oct 7 (Reuters) - Euro zone government bond yields fell slightly on Monday as investors weighed signs of a resilient U.S. economy against concerns U.S.-Sino trade negotiations could fail.

There was some outperformance in Portugal's bond market following a ratings upgrade on Friday and a weekend election.

Friday's closely watched non-farm payrolls report showed the U.S. unemployment rate dropped to near a 50-year low of 3.5% in September, reducing expectations interest rates would be cut this month.

However, Chinese officials have signalled they are increasingly reluctant to strike a broad trade deal pursued by U.S. President Donald Trump, Bloomberg reported, and most investors remain on the sidelines before the trade talks resume this week.

"Everybodys waiting for the trade talks," said Lina Fransson, fixed income strategist at SEB. "Markets will remain cautious ahead" of them.

In addition, data showed German industrial orders fell more than expected in August on weaker domestic demand, more evidence that a manufacturing slump is pushing Europe's largest economy into recession.

Yields in the biggest economies of the euro area traded slightly lower, with the German 10-year Bund yield falling 1.1 basis points (bps) to -0.598%.

Portugal's five-year government yield stood out, however, falling 3.5 bps to -0.26% after the country's ruling Socialists won parliamentary elections on Sunday. The spread between five-year Portuguese and Italian bond yields remained stable at -50.30 bp.

The Socialists fell short of an outright majority, though, meaning Prime Minister Antonio Costa will need to negotiate a new deal with one or both of his far-left allies.

Portuguese bonds were also supported after DBRS on Friday upgraded Portugal's credit rating to BBB.

Traders will be looking forward to the latest Federal Reserve minutes later this week, analysts say, but the main focus will be the U.S.-China trade negotiations expected in Washington on Oct. 10-11.

Recent remarks from the Fed members point to a lack of strong forces within the central bank that could support further monetary policy easing and so investors will scan thoroughly the minutes for more evidence of that ahead of the next meeting at the end of the month.

Fed Chair Jerome Powell reiterated on Monday the U.S. economy was "in a good place", chugging along despite the headwinds it faces.

Money markets price in a 79% chance of an October Fed rate cut, according to the Fed Watch tool, down from nearly 90% recently.

"Were not convinced that the recent rhetoric from Fed policy makers is backing that view", said Peter Chatwell, head of rates strategy at Mizuho.

"Maybe this expectation of capitulation from the Fed and aggressive easing might be a little bit too aggressive," he added.

The Fed cut interest rates for the first time in more than a decade in July and did so again at its subsequent policy meeting in September in what Powell and some others have characterized as "insurance" against risks to the economy. (Reporting by Olga Cotaga; Editing by Larry King and Mark Potter)