November 28, 2018 / 8:44 AM / 18 days ago

Euro zone bond investors play it safe despite buoyant equities

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

By Virginia Furness

LONDON, Nov 28 (Reuters) - Core euro zone bond yields held close to recent lows on Wednesday as investors continued to turn to safe-haven assets despite a broader improvement in risk sentiment on hopes of a calming of the Sino-U.S. trade dispute.

Germany’s 10-year government bond yield, the benchmark for the region, inched down to 0.348 percent in early trade, even as global equity markets turned positive on the hope that Washington and Beijing would broker a trade deal.

World shares rose to two-week highs on Wednesday as White House adviser Larry Kudlow held open the possibility of a deal at the weekend even though he said the U.S. side was disappointed by China’s response so far. The G-20 summit will start on Friday.

Commerzbank strategist Christoph Rieger said he expected Germany’s Bund yield to hold lower towards the end of the year as investors look to reduce risk exposure.

“It is noteworthy how well supported Bunds are with the downside correction rather modest even when equities are up,” he said. “Lots of market participants are keen to go into year end not too exposed to the huge risks which are coming in multiple directions.”

Other high quality euro zone government bond yields edged lower too .

Investors will also be looking for any signs that the U.S. Federal Reserve may consider a pause in hiking interest rates when Fed Chair Jerome Powell speaks later on Wednesday.

BUDGET ROW RUMBLES ON

In Italy, government bond yields proved resilient, rising around one basis point in early trade and holding close to the two-month lows reached this week as investors chose to look through another negative turn in Italy’s budget standoff with the European Union.

Italy’s 10-year government bond yield was last seen at 3.3 percent while its spread over higher rated Germany held comfortably below 300 bps at 296 bps,.

EU commissioner Valdis Dombrovskis told German daily Handelsblatt and Italy’s La Stampa that a “substantial correction” was needed in Italy’s draft budget for 2019.

“The Dombrovskis news underlines how far apart they (the EU, and Italy’s government) are in terms of the deficit procedure,” said Rieger. “But BTP spreads have become somewhat numb to some of the risks now.”

EU government representatives are set on Thursday to back European Commision disciplinary proceedings against Italy over its expansionary budget.

Deputy Prime Minister Matteo Salvini said on Tuesday he wanted to avoid EU disciplinary action over Italy’s 2019 budget. (Reporting by Virginia Furness Editing by Andrew Heavens)

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