UPDATE 1-Euro zone bond yields set for biggest weekly rise in a month

Eurozone bond yields were little changed on Friday, set for their biggest weekly rise in a month, with the focus on U.S.-China trade talks and what a gathering of Germany's Social Democrats could mean for a fiscal boost from Europe's biggest economy. Two leftist critics of the coalition with Angela Merkel's conservatives last weekend won a leadership ballot of the Social Democratic Party (SPD), fuelling talk that they will push for increased German spending.

In their motion for the SPD congress that starts on Friday, the new SPD leaders suggest entering negotiations with Merkel's CDU/CSU conservative bloc on more public investments, a higher minimum wage and more ambitious steps to protect the climate, two-party board members told Reuters. Analysts at UniCredit described the SPD meeting as likely to be "one of the most important gatherings" of the party in years or maybe even decades.

Deutsche Bank strategist Jim Reid said: "It seems that a desire to push for fresh investment has been downplayed ahead of the conference as the party seems to be reining in their new leadership already." "Nevertheless it's worth keeping an eye on the headlines over the next few days."

Trade-in euro zone bonds were largely subdued on Friday, with most 10-year bonds yields across the bloc little changed. Germany's 10-year Bund yield hovered around -0.30 %, up 5 basis points this week and set for its biggest weekly jump in a month. U.S. and Italian bond yields were also set for their biggest weekly rises in a month.

The overall positive take on U.S/China trade talks, as well as signs that the eurozone economy's slowdown may be bottoming out, have pushed bond yields up from record lows hit three months ago. Discussions are "moving right along", U.S. President Donald Trump said on Thursday, striking an upbeat tone on talks to de-escalate the 17-month-old trade war between the world's two biggest economies.

"The trade news is still the number one dominant factor and putting bonds on the back foot as the tone is more constructive overnight," Christoph Rieger, rate strategist at Commerzbank, said. "There's also speculation about changes in fiscal spending in Germany with the SPD congress getting underway - whether we get that remains to be seen but the headlines do get attention."

Pressure on fiscally prudent Germany to spend more and lift a frail economy has ramped up this year. Analysts also noted a rise in Japanese government bond yields, which they attributed to the launch of a $122 billion stimulus package.

The yield on Japan's benchmark 10-year bond rose to as high as -0.015%, nearing the 0% mark for the first since early 2019. There was a little immediate reaction to data showing German industrial output fell sharply in October, with focus turning to Friday's key U.S. jobs numbers.

 

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