November 2, 2018 / 11:15 AM / 12 days ago

UPDATE 2-Euro zone bond yields rise as trade-war fears ebb, US jobs data strong

* Talk of improved U.S.-China ties boosts risk appetite

* 10-year U.S., German yields hit one-week highs

* US Oct nonfarm payrolls rise by 250,000

* EBA to publish stress test results at 1700 GMT (Updates with U.S. jobs data, comment, weekly moves)

By Virginia Furness and Dhara Ranasinghe

LONDON, Nov 2 (Reuters) - Euro zone bond yields rose on Friday after reports that U.S. President Donald Trump was taking steps to resolve a trade war with China fuelled demand for risky assets, and data showing strong U.S. jobs growth pointed to higher interest rates.

Asian equities jumped to three-week highs and European stocks briefly gained more than 1 percent, after Bloomberg reported that Trump was seeking a trade agreement with Chinese President Xi Jinping.

“We’ve seen a correction of the very pessimistic mood by investors, driven by decent earnings and some good news regarding the trade spat,” said Rene Albrecht, analyst at DZ Bank.

“But this looks like election tactics by Trump with the mid-terms next week. With stock markets diving, he probably felt the need to counteract.”

Concern that a U.S.-China trade deal may not be imminent reined in a rally in world stocks as the session wore on, however bond yields in major markets remained higher in response to robust U.S. jobs numbers.

U.S. job growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, pointing to further labour market tightening that could encourage the Federal Reserve to lift interest rates again in December.

Yields on 10-year U.S. Treasuries and German Bunds - key safe-haven assets - rose to their highest in over a week, up four and six basis points respectively on Friday.

Germany’s 10-year bond yield, the benchmark for the region, rose to 0.438 percent. It is up eight bps this week and set for its biggest one-week jump in a month.

Most other higher-grade euro zone government bond yields rose 2 to 4 bps on the day.

“The U.S. jobs data does support the risk scenario that the Fed could do more on rate hikes,” said Norbert Wuthe, fixed income strategist at Bayerische Landesbank.

Trade in U.S. money market futures suggested investors anticipated a higher chance of a December Fed rate hike after the payrolls data.

ITALIAN BOUNCE

Improved risk appetite helped fuel demand for Italian assets, with bond yields falling up to nine bps across the curve.

Italy’s two-year bond yield dipped to a one-month low of 1.11 percent.

The Italian/German 10-year bond yield gap has tightened around 16 bps this week — its biggest weekly narrowing in almost two months.

The bounce in risk appetite offset data showing Italian manufacturing activity contracted for the first time in more than two years in October. Activity for the entire euro zone grew at its slowest pace in more than two years.

After the market close, the European Banking Authority will release the results of its latest stress tests. Analysts will be looking to see how a lengthy selloff in Italian government bonds has affected the balance sheets of the four Italian banks surveyed, according to research by ING.

Reporting by Virginia Furness and Dhara Ranasinghe Editing by Larry King and Peter Graff

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