December 21, 2018 / 8:27 AM / 4 months ago

Euro zone bond yields inch up but weak stocks limit rise

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

By Dhara Ranasinghe

LONDON, Dec 21 (Reuters) - Euro zone bond yields crept up on Friday after heavy falls this week, but the selling in fixed income markets was tepid as concerns about a U.S. government shutdown and further U.S. rate hikes rattled world stock markets.

Italian bond yields rose, reflecting the risk-off tone in world markets. Still, Italian 10-year bond yields were set for a fifth straight week of weekly declines, with sharp falls this week sparked by a budget deal with the European Union.

European stock markets opened broadly lower, while oil prices slid over 4 percent overnight.

Sentiment had turned sour after Wednesday’s U.S. Federal Reserve decision to largely retain plans to lift interest rates in the face of mounting risks to growth.

Markets were also unsettled when U.S. President Donald Trump refused to sign legislation to fund the U.S. government unless he got money for a border wall, thus risking a partial federal shutdown on Saturday.

“Yields are up a bit today and there is some profit-taking after the recent rally,” said René Albrecht, rates strategist at DZ Bank.

“But there is still a basket of factors that should take bond yields lower - fear of a Fed mistake that could lower economic dynamics in the U.S.”

In early Friday trade, 10-year yields on higher-rated bonds in the single currency bloc such as those from Germany , France and the Netherlands were up around 2 basis points on the day.

Germany’s benchmark 10-year Bund yield stood at 0.25 percent — not far off almost seven-month lows hit the previous session at 0.20 percent.

In recent months, German and Italian bond yields have moved in the opposite direction.

However, while Italian bond yields have fallen around 17 bps this week as markets cheered an EU/Italian budget deal that means Italy avoids disciplinary action for its budget plans, German bond yields are set to end the week little changed.

That suggests safe-haven German bonds continue to draw support from the selloff in world stocks even as Italian risks fade for now.

“Given the string of ongoing negative surprises in business sentiment releases, the chance of a powerful rebound (in German Bund yields) appears limited as we head into the final trading days of the year,” analysts at UniCredit said in a note.

Reporting by Dhara Ranasinghe; Editing by Kevin Liffey

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