(Corrects yields on German and French bonds in paragraph 8 of Jan. 13 report. No other changes to text.)
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Olga Cotaga and Yoruk Bahceli
LONDON, Jan 13 (Reuters) - Yields on Germany’s two-year government bond hit a nine-month high ahead of the signing of the China-U.S. Phase 1 trade deal, the first staging post in ending a dispute that threatened to hammer global growth and boosted demand for safe assets bonds.
Investors shifted their attention from the possibility of an imminent war in the Middle East after the United States imposed new sanctions on Iranian officials and businesses.
Traders re-focused on a warming of trade relations between the United States and China, the world’s two biggest economies, with the accord due to be signed at the White House on Wednesday.
The Phase 1 trade deal “stops the bleeding” but does not end the trade war, a senior U.S. Chamber of Commerce official said on Monday, warning that significant challenges would remain.
The United States and China have also agreed to restart semi-annual talks aimed at resolving economic disputes between them, a process abandoned at the start of President Donald Trump’s administration as a trade conflict between the countries escalated.
“Political cheering is likely surrounding the signing of the U.S.-China Phase 1 deal and data is unlikely to disrupt the picture for now,” said Antoine Bouvet, senior rates strategist at ING.
“That said, the situation in Iran remains fragile and the U.S. might well train its trade sights on other targets after progressing in China,” Bouvet said.
Germany’s two-year briefly touched a nine-month high of -0.568. German and French 10-year government bond yields hit 11-day highs at -0.19% and 0.079% , last up around 4 basis points on the day.
French yields were also pushed higher by news over the weekend that Prime Minister Edouard Philippe had offered a major concession to unions contesting his government’s overhaul of the pension system, a move aimed at ending weeks of strikes.
Heavy supply is also putting pressure on government bonds, according to Natixis’ head of research solutions Cyril Regnat.
A hectic pace of issuance continues, with Cyprus naming banks to sell syndicated 10 and 20-year bonds and Spain for a syndicated 10-year deal in the near future, while Dutch, Italian and German auctions are expected this week.
If a risk-on attitude persists among investors, a deal is signed between the United States and China, and Britain avoids a hard Brexit, the 10-year bund yield could rise back to positive territory by the end of the month, Natixis’ Regnat said.
Italian bonds underperformed, rising 6 bps to 1.39% after falling considerably on Friday.
Data highlights this week include inflation data and retail sales in the United States and Britain, as well as industrial production numbers and flash inflation data in Europe. The United States also publishes consumer confidence data.
Reporting by Olga Cotaga and Yoruk Bahceli; editing by Gareth Jones