UPDATE 1-German bond yields hit 3-1/2 month highs on data, trade optimism

Saikat Chatterjee

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

LONDON, Nov 7 (Reuters) - German bond yields hit their highest levels in more than three months on Thursday as growing optimism around a trade deal between the United States and China encouraged investors to dump safe-haven assets.

The yen weakened and stocks extended gains after China and the United States agreed to cancel in phases the tariffs imposed during their months-long trade war, the Chinese Commerce Ministry said, without specifying a timetable.

Bond yields in Europe which have been on an upward path all this week, extended their rise with 10-year German bond yields considered the safe-haven benchmark in Europe, rising to their highest levels since mid-July.

Comparitive French bond yields also pushed into positive territory for the second consecutive day with Belgian, Finnish and Austrian yields inching closer to positive territory.

"On one hand, the data hasn't been all that dismal while the headlines around the trade front is positive," said Benjamin Schroeder, a senior rates strategist at ING.

Thursday's rise in yields comes against the backdrop of a fresh cut in growth estimates by the European Commission which forecast the euro zone economy to expand by 1.1% for 2019, a notch lower than a previous forecast of 1.2%.

A truce between the world's two biggest economies would encourage investors to sell safe-haven government debt and buy stocks and other higher-yielding assets.

Yields on benchmark U.S. Treasury yields rose 6 bps to 1.8774%, its highest levels since mid-September.

A streak of rising yields lasting nearly a week briefly paused after Reuters reported that a meeting between U.S. President Donald Trump and Chinese President Xi Jinping to sign an interim trade deal might be delayed until December .

But the latest headlines on the tariff cancellations fuelled the rise.

"Some of the risks surrounding the global economic outlook have decreased this week, putting upward pressure on bond yields, and the latest headlines suggest that trade negotiations are taking a two-step forward and one-step back approach," said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.

Some positive data this week also pushed up European bond yields. Germany reported on Wednesday that industrial orders rose more than expected in September, offering a glimmer of hope for an export-powered economy hit hard by global trade tensions.

British benchmark bond yields also rose before a Bank of England meeting where policymakers are expected to leave interest rates unchanged.

(Reporting by Saikat Chatterjee; Editing by Larry King and Alison Williams)