Euro zone bond yields rise as trade-war fears recede

LONDON: Euro zone government bond yields rose on Friday before US jobs data and after reports that US President Donald Trump was taking steps to resolve a trade war with China, fuelling demand for riskier assets.

Asian equities jumped to three-week highs and European stocks gained 1.1 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."

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

Germany's 10-year bond yield, the benchmark for the region, reached a high of 0.438 percent.

Most other higher-grade euro zone government bond yields were 2 to 4 basis points higher.,.

The improved risk appetite helped fuel demand for Italian assets, with bond yields falling up to nine basis points across the curve.

Italy's two-year government bond yield briefly dipped to a one-month low of 1.12 percent.,

The bounce in risk appetite also 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.

Further direction might come from the US jobs report due at 1230 GMT. Investors will be looking for more indications on the health of the US economy and the pace of further Federal Reserve interest rate rises.

US job growth is expected to have rebounded in October and wages to have recorded their largest annual gain in 9 1/2 years, pointing to further labour market tightening.

Data on Thursday showed worker productivity slowed in the third quarter, which tempered the rise in yields in late trade, according to an analysis by ING.

"There is perhaps a bit more evidence the US is starting to feel the negative effects of trade uncertainty, higher interest rates and the stronger dollar," analysts at the bank said in a note.

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.