* Euro zone yields as trade war fears ebb
* Italian yields hit 4-month low
* Italy/German gap hits 2-month low
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Fanny Potkin
LONDON, April 5 (Reuters) - Borrowing costs in the euro zone rose on Thursday as an easing of Sino-U.S. trade tensions curbed demand for safe-haven assets.
Italian debt was a focus for investors for a second day as the premium demanded to hold it over the bloc’s benchmark Germany dropped to a two-month low as talks on forming a coalition cranked up in Rome.
Market sentiment was lifted as Washington expressed willingness to negotiate after proposed U.S. tariffs on $50 billion of Chinese goods prompted swift retaliation from Beijing.
The news helped drive European stocks sharply higher on Thursday, led by the STOXX 600 rising 1.5 percent to a two-week high and following a relief rally on Wall Street and Asian markets.
Meanwhile, most government bond yields across the bloc were up to 1-2 basis points in early trade.
The German 10-year yield rose briefly to a one-week high of 0.523 percent, after having dipped below 0.50 percent on Wednesday.
Bund markets also found no comfort in data that showed on German industrial orders rose less than expected in February due to weak domestic demand.
Italian debt continued to outperform its peers, a day after the anti-establishment 5-Star Movement proposed a German-style governing contract with two of its rivals, a month after an inconclusive election.
Italian debt has been trading at a clear premium to its Spanish equivalent, and that gap tightened on Thursday to 55.8 basis points, its narrowest in 2 months, while the gap over Bunds narrowed to 121 basis points.
The 10-year Italian yield hit a four-month low of 1.732 percent at the start of the European session, down 1 basis point on the day.
With Italian President Sergio Mattarella hosting a second day of coalition talks, a process could take weeks and might still end in deadlock, analysts said they expected Italian bonds’ resilience to continue.
“The ongoing narrowing of Italian BTPs highlights investors’ willingness to look through the negative as they opt to take advantage of positive returns which are decidedly difficult to come by elsewhere,” Rabobank strategists wrote as a note.
Later on Thursday, France and Spain plan to sell over 7 billion euros in medium- to long-dated bonds. (Reporting by Fanny Potkin; editing by John Stonestreet)