* Brexit, US/China trade talks remain key focus
* Bond markets bounce back after Friday’s selloff
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds latest news, updates prices)
By Dhara Ranasinghe
LONDON, Oct 14 (Reuters) - Euro zone bond yields fell on Monday as caution surrounding both Brexit and U.S.-China trade talks encouraged investors back into fixed income after a hefty selloff on Friday that sent borrowing costs to 2-1/2-month highs.
Britain and the European Union said on Sunday a lot more work would be needed to secure a transition deal governing Britain’s exit from the EU, pushing sterling more than 1% lower against the dollar and euro.
Ten-year gilt yields in Britain slid 6.4 basis points , dragging euro zone peers lower.
Bank of England Deputy Governor Jon Cunliffe said on Monday that people should not rule out the possibility that the British central bank might need to raise interest rates after any “no-deal” Brexit.
In Germany, the euro zone’s benchmark bond issuer, 10-year yields fell 1.2 basis points to -0.46% after touching their highest since the start of August on Friday at around -0.43%.
“We had a lot of (Brexit) optimism after Thursday’s meeting between Ireland and Britain, but those hopes have been dialled back a notch over the weekend,” said Peter Schaffrik, global macro strategist at RBC Capital Markets in London.
U.S. and Chinese officials also said more work is needed before a trade agreement can be reached, even though U.S. President Donald Trump on Friday outlined the first phase of a deal to end the trade war and suspended a threatened tariff increase set for Oct. 15.
Nevertheless, U.S. Treasury Secretary Steven Mnuchin said on Monday that an additional round of tariffs on Chinese imports will likely be imposed if a trade deal with China has not been reached by then.
Data from China underlined the bitter trade war with dollar-denominated exports and imports both falling by more than expected in September.
“The aggressive selloff of the last few days is not justified by the reality in terms of the economic situation, and in terms of the trade developments that are feasibly possible given the differences between the two sides,” said Peter McCallum, rates strategist at Mizuho.
“We do not expect improvement on the trade front to be sufficient as to prevent a material slowing in the U.S. economy.”
Having sold off on Friday amid growing optimism about a Brexit deal and U.S.-China trade talks, bond markets across the euro area rallied on Monday, pushing yields lower.
Germany’s 30-year bond yield, which pushed back above 0% late last week, tumbled 4.2 bps to 0.037%.
Ten-year bond yields in France, the Netherlands and Italy were also down by 2 to 3 bps each .
Unexpected signs of progress between the Irish and British governments on Brexit last week boosted hopes that one source of uncertainty that has hurt the growth outlook in world markets might finally be lifting.
Elsewhere, there was some focus on Spain where the Supreme Court on Monday sentenced nine separatist leaders from Catalonia to between nine and 13 years in prison for sedition over their role in a failed independence bid, triggering protests in Barcelona.
There was little immediate market reaction, with Spanish bond yields down in line with their peers.
Reporting by Dhara Ranasinghe Editing by Larry King and Kirsten Donovan/Mark Heinrich