July 31, 2019 / 7:49 AM / 4 months ago

Euro zone bond yields edge lower on Brexit and trade angst

* Core euro zone debt well bid ahead of Fed meeting

* Irish yields fall after Tuesday’s jump

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Tommy Wilkes

LONDON, July 31 (Reuters) - Euro zone bond yields fell back towards recent lows on Wednesday as investors worried about a no-deal Brexit and the state of U.S.-China trade talks before an expected interest-rate cut by Federal Reserve.

Irish bond yields, which jumped on Tuesday on no-deal Brexit fears, were lower.

The Fed is expected to cut rates by 25 basis points later on Wednesday. Investors will focus on its guidance for any further rate reductions. Euro zone flash inflation and GDP data are also due, at 0900 GMT.

Last week, the European Central Bank set out plans for a package of stimulus measures but brought a halt to a bond rally by not cutting rates immediately. Since then, risk aversion has drawn investors back to the safety of European government debt.

The benchmark 10-year German bund yield rose 1 bp to -0.404% , not far from the record low of -0.42%. French and Austrian bond yields rose as well.

Italian yields also dropped, reversing some of their recent rise on worries about domestic political uncertainty and the speed of any ECB stimulus, which would ease concerns about the indebted economy.

The 10-year Italian bond yield fell 2 bps to 1.564% . Last week, at the time of the ECB meeting, the yield had dropped as low as 1.38%. Shorter-dated Italian bond yields also weakened in early Wednesday trading .

Whether big investors come back to the Italian bond market over the next few weeks will be a good guide to how strongly investors believe the ECB will resume quantitative easing, since Italian bond markets should be one of the main beneficiaries, said Cyril Regnat, a fixed-income strategist at Natixis.

Some analysts said investors were nervous about chasing large moves in the European government bond market.

“Risk aversion has taken hold of European rates markets going into the all-important July Fed meeting,” ING strategists said in a note.

There was a “poor risk-reward of chasing the rally in spread products, especially BTPs (Italian government bonds) given the headline risks relating to government tensions,” they said.

Irish spreads calmed after a big rise on Tuesday. The Ireland/Germany 10-year bond yield spread stood at 55 bps on Wednesday, after widening to as much as 59 basis points on Tuesday, the widest since June 5.

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