November 25, 2019 / 11:39 AM / 6 months ago

UPDATE 2-Euro zone bond yields edge up on trade deal hopes, inflation expectations slump

* U.S.-China trade news keeps yields steady

* German business morale improves; no reaction

* ECB increases public sector bond purchases

* Euro zone periphery government bond yields (Adds quotes, inflation expectations, ECB bond purchase data)

By Yoruk Bahceli and Elizabeth Howcroft

LONDON, Nov 25 (Reuters) - Euro zone bond yields edged up on Monday, as positive trade war developments trumped uncertainty and weak euro zone data that boosted safe-haven assets last week.

China and the United States are very close to a "phase one" trade deal, the Global Times, a tabloid run by the ruling Communist Party's official People's Daily, said on Monday, discounting "negative" media reports.

But U.S. and Chinese officials said the ambitious "phase two" trade deal is looking less likely as the two countries struggle to strike a preliminary agreement.

"It's hard for the market to get a signal," said ING senior rates strategist Antoine Bouvet, expecting less progress this week on negotiations giving the Thanksgiving holiday.

Market sentiment was lifted by news over the weekend that China was seeking to raise substantially the upper limits for intellectual property violation fines, a big sticking point in trade negotiations.

Most euro zone government bond yields recovered from 2-1/2 week lows hit last week hit on trade uncertainty and euro zone data, which showed that business growth had almost ground to a halt and the services industry growth was weaker than expected.

The German Ifo survey showed German business morale rose in November and the country is on track to grow by 0.2% in the fourth quarter. Yields were unmoved, with the survey coming after data earlier in November showed Germany's economy surprisingly grew during the third quarter.

The German benchmark 10-year bond yield was up around a basis point in late trade at -0.35%.

The five-year, five-year breakeven forward rate, a euro zone inflation measure closely tracked by the ECB, slumped to a six-week low at 1.18%.

The move came ahead of euro zone November inflation estimates due on Friday. A Reuters poll expects a 0.9% increase in prices compared to last year, a small uptick compared to October's 0.75% reading. This remains far below the European Central Bank's inflation target of close to, but below, 2 percent.

The reading demonstrates that the "market is not upgrading its macro outlook", ING's Bouvet said.

Over the weekend, Fitch ratings agency kept Portugal's rating as BBB, with outlook positive

The spread between German and Portuguese 10-year yields, which widened to its most in two months on Friday as Southern European debt has sold off in recent weeks, started to narrow again, down to 72 bps from 78 bps.

The ECB accelerated the amount of bonds bought under its public sector purchase programme last week, at 6 billion euros compared to 2 billion euros the previous week.

The increase came at the expense of private sector debt, which had accounted for a much higher share of the total purchases compared to the last round of quantitative easing. This had led to speculation that the ECB may shift bond buying towards corporate and covered bonds as it approaches self-imposed limits on public sector bonds.

Elsewhere, there will be a debate among European Central Bank policymakers in the coming months on the ECB's monetary policy objectives, and all of them will be fair game, Governing Council member Robert Holzmann said on Monday. (Reporting by Elizabeth Howcroft and Yoruk Bahceli; Editing by Edmund Blair, Alexander Smith and Giles Elgood)

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