UPDATE 1-Euro zone yields steady after Brexit jitters trigger fall

Euro zone bond yields steadied on Wednesday after falling on renewed anxiety about Brexit after Britain set a hard deadline of December 2020 to reach a trade deal with the European Union, creating a new cliff-edge.

Prime Minister Boris Johnson's ruling-out of any extension to the transition period after Britain leaves the EU on Jan. 31 caught markets off-guard after they had priced out many Brexit worries following his election victory last week. Investors have dumped safe-haven government debt for riskier assets in recent weeks on signs the eurozone economy is rebounding and in anticipation of an agreement on the first phase of a U.S.-China trade deal.

Jan von Gerich, an analyst at Nordea, said that despite concerns about the Brexit negotiations he expected sentiment in bond markets to remain upbeat going into 2020. "The general tone is still positive in that people think the worst is behind us for the economy," he said while adding that he didn't "buy the optimism" about the health of the eurozone economy and the phase one deal between Washington and Beijing.

Investors are nevertheless ready to push yields higher, von Gerich said, believing economic and political uncertainty had eased. The 10-year German bond yield could rise another 15 to 20 basis points in the coming weeks, with a move back into positive territory not out of the question, he added. In quiet trading, a better-than-expected reading of the German Ifo institute's business climate index failed to move markets. The index rose to 96.3 in December, suggesting the euro zone's largest economy grew by 0.2% in the fourth quarter.

The German 10-year yield stood at -0.287% on Wednesday, unchanged, while other core eurozone yields were also little moved. Italian yields dropped, with the 10-year yield down nearly 2 basis points on the day at 1.259% ahead of another vote on the upcoming 2020 budget that the government must get passed before the end of the year.

Eurozone inflation accelerated in November to 1%, official data showed, confirming an earlier estimate. "As 2020 gets closer, we reiterate our core themes of looking for a Q1 rebound in macro data, which should put upward pressure on yields before the ongoing uncertainty caused by the trade war causes a slowdown to emerge," Mizuho fixed income analysts said in a research note.

The 10-year British gilt yield slipped 1 basis point to 0.757% after falling 3 basis points on Tuesday. There was little fresh news on the rumored trade deal between China and the United States.

Optimism that the world's two largest economies will resolve their most serious trade disagreements has fuelled a rally in stocks and a selloff in eurozone debt since October, reversing much of the collapse in government bond yields to record lows seen in August and September.