UPDATE 1-Euro zone bond yields lift as investors bet on eventual trade deal

Eurozone bond yields rose slightly on Tuesday, while global shares touched their highest in nearly two years, on rising expectations among investors that the United States and China will eventually secure a trade deal.

The German 10-year Bund yield was up one basis point at -0.3240%. French 10-year yields were similarly muted, recovering only slightly from last week, when Germany and France recorded the biggest declines in borrowing costs since September. The yield spreads between 10-year German and peripheral government bonds - such as Spain, Italy, and Portugal - continued to retrace the previous week's steep widening.

Spanish 10-year yields fell around a basis point to a weekly low of 0.407%, which it also hit on Monday, tightening their spread with German Bunds. "Profit-taking into year-end seems the dominant theme, and particularly foreign investors should be reluctant to recommit in the face of increasing political uncertainty in Spain as well as Italy," Commerzbank strategists wrote in a note to clients.

The MSCI world equity index, which tracks shares in 47 countries, gained 0.1% to touch its highest since January last year, as investors maintained bets that the United States and China can reach a deal to end their damaging trade war. Trade tensions have dominated sentiment in recent days. Market positioning means bond yields are especially receptive to positive trade-war developments, said Lyn Graham-Taylor, a fixed-income strategist at Rabobank.

The next round of U.S. tariffs on Chinese goods takes effect on Dec. 15. Hopes for a trade deal are diminishing amid reports the United States is reluctant to roll back existing tariffs. But in a positive sign for U.S.-China relations, the United States offered Chinese tech company Huawei a 90-day license extension.

"The market has been trading trade-related headlines asymmetrically for quite a long time. If it's vaguely ambiguous or slightly positive it will be traded in quite a positive fashion - yields will sell-off," Graham-Taylor said. More turbulence in Hong Kong has so far had limited broader ramifications for China or the global economy, he said.

Protests in Hong Kong escalated in recent days, with more than 200 people injured and pro-democracy protesters in a university surrounded by police. "It's not fed through into the global economy as of yet - at the moment it's not playing a role in the trade war," Graham-Taylor said.

Minutes are due on Wednesday from the October meeting of the U.S. Federal Reserve's federal open markets committee and the European Central Bank's new president, Christine Lagarde, will speak in Frankfurt on Friday. Eurozone PMI data is also due on Friday.