UPDATE 2-Euro zone bond yields rise to three-week highs as geopolitical fears ease

Eurozone government bond yields rose to three-week highs on Thursday on optimism around trade U.S./China trade talks and after the British and Irish prime ministers said they still saw a path to a Brexit deal. Analysts say bouts of good news are being taken as an opportunity by investors to take profit before re-entering on trades that bet on further bond market gains given a weak economic outlook.

This has been complemented by a growing sense that monetary easing from the European Central Bank has run its course for now, which has eased a strong bond rally over the summer. Key benchmark German bond yields are 10 bps higher this week after three straight weeks of falls.

Chinese Vice Premier Liu He said on Thursday that China is willing to reach an agreement with the United States on matters that both sides care about, state news agency Xinhua reported. The U.S. will soon issue licenses allowing some U.S. companies to supply non-sensitive goods to China's Huawei, according to The New York Times.

Meanwhile, British Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar said they saw a pathway to a possible Brexit deal after a last-ditch meeting aimed at paving a way for the United Kingdom to leave the European Union in an orderly way. Ten-year government bond yields were up 7 to 8 basis points across the eurozone. The 10-year German benchmark reached a three-week high at -0.48% and 30-year yields briefly budged back above 0%.

Ireland's 10-year bond yield meanwhile pushed further into positive territory and was last trading up 6.4 bps on the day at 0.07%. "The striking move from Bunds ... has to do with the general speculation about risk sentiment and the trade talks and some views in the market that things are not escalating, and some tentative signs that there could be some partial deals between the U.S. and China," said Commerzbank strategist Rainer Guntermann.

The 10-year Italian BTP yield rose as much as 10 basis points to 1.07%, its highest since late August. Fresh supply from Italy this week has added to the upward pressure on bond yields.

Italy issued $7 billion in a three-part syndicated dollar bond deal on Wednesday, while as much as 6.5 billion euros worth of bonds is expected to be sold at an auction on Friday. Dissent at the ECB was in focus after the publication of the minutes from the bank's September meeting. The Financial Times meanwhile reported that outgoing ECB President Mario Draghi ignored dissent about the relaunch of a quantitative easing programme.

"In the euro zone, it shows that the bar for additional easing is extremely high," said KBC strategist Mathias van der Jeugt. "It's one of the reasons we haven't revisited the lows (hit in August and September) in yields." In a sign that investor appetite for negative-yielding debt is far from abating, Greece on Wednesday sold three-month treasury bills to with the yield turning negative for the first time ever.

"We expect negative yields in the next Greek 6-month T-bill auctions. is the result of the stabilization of the economy and the growth potential," said Kostandinos Boukas, asset manager at Beta Securities in Athens.

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