November 9, 2018 / 8:35 AM / 10 months ago

Euro zone bond yields inch down as China data fans growth worries

* Weak equities, China data lifts EZ bonds

* German Bund yields fall from 2-week highs

* US 2, 5-year bond yields hit decade highs after Fed meeting

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, Nov 9 (Reuters) - German 10-year bond yields fell from more than two-week highs on Friday, leading a move lower in most euro area debt yields as weak Chinese economic data fuelled concerns about the global growth outlook.

China’s factory-gate inflation slowed for the fourth month in October on cooling domestic demand and manufacturing activity, suggesting Beijing would likely roll out more stimulus in the face of trade frictions with the United States.

The data weighed on stock markets, lifting demand for safe-haven assets.

That overshadowed a move in short-dated U.S. Treasury yields to decade highs on Thursday after the U.S. Federal Reserve held interest rates steady but remained on track to keep gradually tightening borrowing costs.

Germany’s benchmark 10-year government bond yield fell 2.5 basis points to 0.43 percent in early Friday trade, down from a more than two-week high at around 0.47 percent on Thursday.

Ten-year bond yields across the single-currency bloc, with the exception of Italy, were down 1-3 bps on the day.

“The big news overnight is the Chinese data,” said Pascal Segesser, a rates strategist at DZ Bank.

“There are worries about trade wars and how the slowdown in China will impact the rest of the world, so there’s a typical risk-off move in markets today.”

World trade frictions, a budget standoff between Italy and Brussels and volatility in stock markets have raised concerns about the outlook for economic growth.

Late on Thursday, European Central Bank chief Mario Draghi said the ECB’s policy guidance is not carved in stone and can be changed if the outlook darkened.

In contrast, the U.S. Federal Reserve appeared on track to raise rates again in December following its latest meeting.

Analysts said Thursday’s Fed statement was broadly in line with expectations.

After that meeting, interest rate futures implied a 78 percent chance the U.S. central bank would raise rates at its Dec. 18-19 meeting, little changed from late on Wednesday, CME Group’s FedWatch program showed.

“A December hike looks pretty much baked in at this point, and three further hikes in 2019 still seem like the most likely outcome,” ING analysts said in a note.

Weakness in world stocks, with European shares opening 0.6 percent lower, hurt sentiment towards riskier Italian bonds.

Italy’s 10-year bond yield rose 1.5 bps to 3.41 percent . It is up 10 bps this week, and set for its biggest weekly rise in almost a month.

Reporting by Dhara Ranasinghe; Editing by Hugh Lawson

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