UPDATE 2-Euro zone bonds pause after bond sales, US-China trade deal

* German Bund yield holds below 2-week low

* Caution sets in after signing of Phase 1 trade deal

* Italy bond deal stats, ECB in focus

* Euro zone periphery govt bond yields (Adds details on demand for Italian bond, ECB minutes, comment)

LONDON, Jan 16 (Reuters) - Most euro zone bond yields were marginally lower on Thursday, with German Bund yields just below two-week highs following the signing of an initial U.S.-China trade deal and two days of sizeable new bond sales.

The easing in trade tensions and signs that the euro zone economy is improving have put upward pressure on borrowing costs. Yet markets appear reluctant to push benchmark German Bund yields above -0.20% without a hawkish signal from the European Central Bank, analysts said.

Germany’s 10-year bond yield fell 1 basis point to -0.22% , below Wednesday’s two-week high around -0.17%. Most other 10-year euro zone bond yields were steady as caution set in after the signing of the trade deal between the United States and China. This lent some support to fixed income markets.

The Phase 1 deal fails to address structural economic issues that led to the trade conflict, does not fully eliminate the tariffs that have slowed the global economy, and sets hard-to-achieve purchase targets, analysts and industry leaders said.

“We are happy with the Phase 1 trade deal, but we think there is a fundamental problem that won’t go away, so we are more careful not to overestimate the positive news,” said Wouter Sturkenboom, chief investment strategist for EMEA and APAC at Northern Trust Asset Management.

This week’s stellar syndicated bond deals from Spain and Italy remained in the spotlight, with focus on the level of demand from Asian accounts.

“Although the record (Spanish) order book is grabbing the headlines, the key detail is that Asian demand has been effectively zero,” said Michael Leister, rates strategist at Commerzbank.

Japanese investors were generally selling higher-rated euro zone government bonds late last year, while they were buyers of Spanish bonds.

Just 1.3% of demand for Spain’s sale came from non-European and non-American regions, according to statistics released by Spain’s treasury. This means that demand from Asian accounts was effectively negligible, compared to around 11% for similar sales last January and June .

“The yields have come down compared to last year, so the coupon is much lower. Whenever you’re going to have a coupon lower than 1%, the interest gets lower,” said a banker involved with the Spanish sale.

“The Japanese market have yields above 0% so they don’t need to come here to get very very low yields.”

Japanese government bond yields rose in the fourth quarter of 2019 and the 10-year yield has been hovering around positive territory since December.

Meanwhile, Asian investors bought around 4% of Italy’s sale , slightly higher than last year’s sales.

The 10 billion euro sale of Spanish 10-year government bonds attracted demand of more than 52 billion euros ($57.88 billion), the highest level ever for a sale in euros. Italy on Wednesday sold a new 7 billion-euro, 30-year bond that saw the highest-ever demand for an Italian syndicated issue, according to a lead manager.

European Central Bank policymakers took a more upbeat view on economic developments in their Dec. 12 meeting but continued to see an abundance of risk that warrant ultra-easy policies, the accounts of the meeting showed on Thursday.

The 13-page document however made only a brief mention of the ECB’s upcoming policy review, a one-year deep dive that is likely to set course for the bank over much of the next decade and dominates investors’ interest.

Reporting by Dhara Ranasinghe and Yoruk Bahceli Editing by Larry King and Frances Kerry