UPDATE 1-Euro zone bonds pause after bond sales, US-China trade deal

Most euro zone bond yields were little changed on Thursday, with German Bund yields just below two-week highs following the signing of an initial U.S.-China trade deal and two days of sizeable new bond sales.

The easing in trade tensions and signs that the euro zone economy is improving have put upward pressure on borrowing costs. Yet markets appear reluctant to push benchmark German Bund yields above -0.20% without a hawkish signal from the European Central Bank, analysts said. Germany's 10-year bond yield held just below Wednesday's two-week high around -0.17%. Most other 10-year euro zone bond yields were steady as caution set in after the signing of the trade deal between the United States and China. This lent some support to fixed income markets.

The Phase 1 deal fails to address structural economic issues that led to the trade conflict, does not fully eliminate the tariffs that have slowed the global economy, and sets hard-to-achieve purchase targets, analysts and industry leaders said. "We are happy with the Phase 1 trade deal, but we think there is a fundamental problem that won't go away, so we are more careful not to overestimate the positive news," said Wouter Sturkenboom, chief investment strategist for EMEA and APAC at Northern Trust Asset Management.

This week's stellar syndicated bond deals from Spain and Italy remained in the spotlight. Analysts said the allocation statistics of Wednesday's Italian 30-year bond deal were in focus after the buying breakdown of a Spanish bond sale on Tuesday showed a lack of interest from Asian investors. "Although the record (Spanish) order book is grabbing the headlines, the key detail is that Asian demand has been effectively zero, in striking contrast to the two 10-year SPGB (Spanish government bond) syndications where Asian investors absorbed more than 10%," said Michael Leister, rates strategist at Commerzbank.

The 10 billion euro sale of Spanish 10-year government bonds attracted demand of more than 52 billion euros ($57.88 billion). Italy on Wednesday sold a new 7 billion-euro, 30-year bond that saw the highest-ever demand for an Italian syndicated issue, according to a lead manager. Minutes from the ECB's December meeting will be published later on Thursday, while ECB chief Christine Lagarde is scheduled to speak later in the session.

"It was Lagarde's first meeting and it will be interesting to see what kind of discussion they had," said Luca Cazzulani, a rates strategist at UniCredit, referring to the release of the minutes.

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