December 23, 2019 / 11:03 AM / a month ago

UPDATE 2-Euro zone bond yields hold steady in pre-holiday lull

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

* Bond yields off 6-month highs

* ECB’s Knot says rates could stay low for years (There will be no London-based euro zone bond market report on Dec. 24 due to the Christmas holiday)

By Dhara Ranasinghe

LONDON, Dec 23 (Reuters) - Euro zone bond yields were broadly flat on Monday as investors chose safe-haven government debt in thin pre-holiday trade.

French, German and Dutch 10-year bond yields last week hit their highest levels in around six months after Sweden’s central bank ended five years of negative interest rates - reinforcing a sense in markets that major central banks may be done with pushing borrowing costs further below zero.

But they rose less than one basis point on Monday, reflecting demand for safe-haven sovereign debt ahead of Christmas.

Germany’s benchmark 10-year Bund was little changed at -0.24%, about 6 bps below last week’s high.

Still, it has risen 50 bps from record lows set in early September - reflecting an easing of worries over Brexit and a bitter U.S./China trade conflict as well as signs that the worst may be over for the euro zone economy.

“There is a feeling that the bad news that pushed yields down to extreme levels has trickled away, which means other factors such as better data could start to come into play more,” said Andy Cossor, rates strategist at DZ Bank.

China said on Monday it would lower tariffs on products ranging from frozen pork and avocado to some types of semiconductors next year as it looks to boost imports amid a slowing economy and the trade war with the United States.

The news had little impact on markets, which have already adjusted to a thawing in U.S.-China trade relations.

Elsewhere, European Central Bank Governing Council member Klaas Knot said interest rates in the euro zone could remain historically low for years, but the ECB’s ultra-loose monetary policy risks becoming counterproductive.

“More strikingly though he also noted that ‘from a macro-economic perspective that would be undesirable,’ said Chris Bailey, European Strategist at Raymond James.

“Yes, learn from the experience of Japan. If the ECB does change a little in 2020 then expect bond yields to be the area to struggle.”

Italian bond yields edged higher after a sale of Italian debt. Italy’s 10-year bond yield was last up 3 bps on the day at 1.45%, having been little changed for much of the morning session.

Reporting by Dhara Ranasinghe; Editing by Toby Chopra, Kirsten Donovan and Giles Elgood

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