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Euro zone bond yields inch higher on trade war optimism

Dhara Ranasinghe

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

LONDON, Nov 4 (Reuters) - Euro zone bond yields crept up on Monday following upbeat noises from U.S.-China trade talks and a slightly stronger tone to U.S. economic data.

World stock markets were firmer, denting demand for safe-haven bonds, after the United States and China both said on Friday that they had made progress in talks aimed at defusing a protracted trade war. U.S. officials said a deal could be signed this month.

A bitter trade war and Brexit uncertainty have driven concern about a weak global growth outlook this year, sparking rate cuts from major central banks and driving borrowing costs down.

Growing confidence that Britain can avoid a no-deal Brexit pushed up bond yields in October. Data on Friday showed U.S. jobs growth slowed less than expected in October, lifting expectations that the U.S. Federal Reserve will not be in a hurry to lower interest rates again.

"We've seen a minor bear market in fixed income in recent weeks," said DZ Bank rates strategist Christian Lenk. "I think we've moved a little bit too much into optimistic territory but that now depends on outcomes," he added, referring to data and the trade talks.

Most 10-year bond yields were 1-2 basis points higher on the day.

Germany's benchmark 10-year Bund yield was 1.2 bps higher at -0.37%, above two-week lows hit last week at around -0.42%.

Italy's 10-year bond yield was almost 3 bps higher at 1.13% , having touched its highest level since late August.

In the euro area, analysts said latest business activity data and Christine Lagarde's first speech as European Central Bank chief were in focus.

Lagarde, who took office on Friday, will have to heal a rift between representatives of cash-rich countries such as Germany, the Netherlands and France, who opposed the decision to resume bond purchases, and the struggling periphery.

She has struck a balanced tone, saying an accommodative monetary policy was needed but also had side effects that needed monitoring.

"Lagarde is likely to use the opportunity to give her views on the future of the euro zone, including the need for fiscal easing in the countries with room to do so," said Peter Chatwell, head of rates strategy at Mizuho. (Reporting by Dhara Ranasinghe)