* German Bund yield hovers close to 6-week lows
* U.S./China trade tensions hurt growth outlook
* Bund yields set for biggest weekly fall in 7 weeks
* Italy yields set for biggest weekly rise in 3 months (Updates prices)
By Dhara Ranasinghe
LONDON, May 10 (Reuters) - German 10-year government bond yields headed for their biggest weekly fall in seven weeks on Friday as renewed U.S./China trade tensions fuel concerns about the economic growth outlook.
A U.S. tariff increase to 25% on $200 billion worth of Chinese goods took effect on Friday. Beijing said it would strike back, increasing tensions as the two sides pursue last-ditch talks to try salvaging a trade deal.
Stock markets in China and Europe seemed to be looking past the tariff hike, pushing safe-haven German 10-year bond yields off six-week lows hit on Thursday at minus 0.069%.
Still, Friday’s rise in euro zone bond yields was marginal, with German yields set for their biggest weekly drop in seven weeks, down nearly seven basis points.
“I’m sure that once the 10-year bond yield was back in positive territory some accounts came back in to buy,” said Cyril Regnat, fixed income strategist at Natixis.
German two-year bond yields are close to their lowest levels since the start of 2019 and long-dated Dutch yields were also set for their biggest falls in six weeks .
Ten-year U.S. Treasury yields on Thursday meanwhile briefly fell below three-month bill rates for the first time since March when an inversion had stoked talk of a U.S. recession.
“The possibility of more protracted U.S.-China trade stand-off has seen Europe’s tentative growth optimism slipping away - and with it fiscal concerns are creeping back in,” said ING senior rates strategist Benjamin Schroder.
Italy’s bond market stabilised after this week’s selloff, with 10-year yield slightly lower on the day at 2.685 percent. Still, with a rise of 13 bps this week, it was set for its biggest weekly jump in three months.
Infighting within the ruling coalition, a warning from the European Commission that public finances would deteriorate further and politicians raising the possibility that Italy could breach EU rules on public spending have unnerved investors.
Italian Economy Minister Giovanni Tria said on Thursday the European Union’s public finance rules known as the “fiscal compact” should be scrapped because they are bad for the economy.
“This all feeds into a narrative that Italy is headed up for a confrontation with the EU later this year,” said Rabobank rates strategist Lyn Graham-Taylor. “At the current level, we would be short Italian bonds heading into the European parliament elections.”
Reporting by Dhara Ranasinghe; Editing by Toby Chopra