October 7, 2019 / 8:10 AM / 15 days ago

Euro zone yields stable before US-Sino trade talks; Portuguese yields fall

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

By Olga Cotaga

LONDON, Oct 7 (Reuters) - Euro zone government bond yields were little changed on Monday as investors weighed the prospects of a resilient economy in the United States against concern that U.S.-Sino trade negotiations would fail.

Friday’s closely watched non-farm payrolls report showed the U.S. unemployment rate dropped to near a 50-year low of 3.5% in September, with job growth increasingly moderately, reducing expectations interest rates would be cut this month.

“Friday’s job report should prove supportive for risk sentiment,” said ING rates analysts in a note, adding that “weak wages reduce a key hurdle to Fed easing.”

But Chinese officials signalled they were increasingly reluctant to strike a broad trade deal pursued by President Donald Trump, and investors remained on the sidelines before the trade talks resume this week.

“Everybody’s waiting for the trade talks,” said Lina Fransson, fixed income strategist at SEB. “Markets will remain cautious ahead” of them.

In addition, data showed German industrial orders fell more than expected in August on weaker domestic demand, more evidence that a manufacturing slump is pushing Europe’s largest economy into recession.

Yields in the euro area traded broadly neutral, with the German 10-year Bund yield falling 0.4 basis points to -0.59% .

Portugal’s 10-year government yield stood out, falling 1.4 bps to 0.13% after the country’s ruling Socialists won parliamentary elections on Sunday.

The party fell short of an outright majority, though, meaning Prime Minister Antonio Costa will need to negotiate a new deal with one or both of his far-left allies.

Portuguese bonds were also supported by news on Friday that DBRS has upgraded Portugal’s credit to BBB.

Traders will be looking forward to the latest Federal Reserve minutes later this week, analysts say, but the main focus will be the U.S.-China trade negotiations expected in Washington on Oct. 10-11. (Reporting by Olga Cotaga, editing by Larry King)

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