Wires

Euro zone bond yields steady, trade war caution supports market

Dhara Ranasinghe

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

LONDON, Nov 18 (Reuters) - Government bond yields in the euro area were little changed on Monday, supported by caution over U.S.-China trade talks.

President Donald Trump had not yet agreed to remove any tariffs as part of a trade deal, and the size of China's commitment to purchase U.S. farm products was not yet clear, Commerce Secretary Wilbur Ross said on Friday.

In early trade, most 10-year bond yields in the euro zone were largely flat on the day, as markets awaited new bonds from Belgium and Slovakia and digested news of a cut in a key Chinese interest rate.

At -0.32%, Germany's benchmark 10-year Bund yield was not far off more than one-week lows reached last week at -0.30%. It fell almost 7 bps last week in its biggest weekly decline since September.

"The market clearly took back some positivity last week. This seems to be driven in part by rising scepticism on the timing of a phase-one (trade) deal," said Henry Occleston, a rates strategist at Mizuho. "We see relative strength in the Bund persisting, particularly against Spanish and Italian bonds."

In a note, analysts at UniCredit said that if a phase-one trade deal occurs, 10-year U.S. Treasury and German bond yields could rise another 10 to 20 bps before questions are raised about the next phase of talks.

But if the current discussions fail and tariffs are increased, U.S. Treasury yields -- currently around 1.84% -- could fall to around 1.5% and Bund yields could drop closer to -0.6%, they said.

While higher-rated bond markets such as German, French and Dutch ones rallied last week, pushing borrowing costs lower, southern European debt markets have come under selling pressure.

Analysts attribute the rise in yields in Italy and Spain in the past week to renewed political uncertainty, a desire by investors to lock in profits before books are closed for the year, and a growing sense that the bar to further European Central Bank stimulus is high.

Ten-year bond yields in the periphery were little changed in early Monday trade, with the gap between 10-year Italian and German bond yields at 165 basis points -- down from last week's two-and-a-half-month highs above 170 bps.

There was some relief for Italy after ratings agency DBRS on Friday affirmed the country's credit rating at BBB (high) with a stable outlook. (Reporting by Dhara Ranasinghe, editing by Larry King)