November 8, 2019 / 8:41 AM / 13 days ago

Euro zone bond yields near 16-week highs on trade optimism

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

By Yoruk Bahceli

LONDON, Nov 8 (Reuters) - Euro zone bond yields were near 16-week highs on Friday after China and the United States agreed to roll back tariffs if they complete the first phase of a trade deal.

The Chinese Commerce Ministry, without laying out a timetable, said the two countries had agreed to cancel the tariffs in phases.

A U.S. official, speaking on condition of anonymity, confirmed the rollback would be part of the first phase of a trade agreement that is still being put on paper for U.S. President Donald Trump and Chinese President Xi Jinping to sign.

Outgoing European Commission President Jean-Claude Juncker does not believe UTrump will impose tariffs on imported European cars next week, he told Germany’s Sueddeutsche Zeitung on Thursday.

“The more tangible noise about a possible near-term agreement [between U.S. and China] and at the same time that the threat (to) European cars is off the table all helped to boost the risk sentiment,” said Commerzbank rates strategist Rainer Guntermann.

The boost to risk sentiment has hurt safe-haven government bonds. Germany’s 10-year bond yield is up 13 basis point this week, set for its biggest weekly rise in a month.

The rise in bond yields sent German 20-year and French 10-year yields into positive territory for the first time since July. Finland’s 10-year yield was the latest to reach positive territory, briefly touching 0.001% on Friday. It was last trading at -0.02%.

Most 10-year government bond yields were around 1 basis point lower in early trade , with Germany’s benchmark at -0.26%, off a 16-week high of -0.25% hit on Thursday.

Italian government bonds outperformed, with the 10-year yield down 3 basis points after a sell-off on Thursday that sent it up 13 bps.

Focus now turns to the Spanish election on Sunday, the country’s fourth election in four years. The bond market appears unconcerned, with the gap between Spanish and German 10-year government bond yields at its lowest point since July at 62 bps .

“There are very little signs of underperformance of late,” said Commerzbank’s Guntermann.

“I think it has to do with the view and message from the polls that no clear-cut majority is likely to come out of this election and if anything the odds for a more left-wing government, which could risk higher spending, is very low.”

The Socialists will lead but lose two seats compared with the last parliamentary election, in April, according to an El Pais poll from Sunday.

“We’re not expecting a huge macro change,” said Ross Hutchison, rates fund manager at Aberdeen Standard Investments. “The picture is relatively good for the periphery, especially Spain. Catalonia is volatile and relevant but poses no immediate risk.” (Reporting by Yoruk Bahceli; additional reporting by Dhara Rhanasinghe; editing by Larry King)

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