UPDATE 2-German Bund yields turn positive on Brexit hopes, U.S.-China trade

Euro zone bond yields were lifted off recent lows on Wednesday with Germany's benchmark 10-year Bund heading back above zero percent as hopes of a softer Brexit fuelled risk appetite and investors took heart from signs of progress in U.S.-China trade talks.

British Prime Minister Theresa May said on Tuesday she was seeking another short extension to Brexit beyond April 12, and offered to work with opposition Labour Party leader Jeremy Corbyn to agree a divorce deal. Analysts say this suggests May is pivoting towards a softer Brexit. "May has finally arrived at the point she should have begun the process at, by asking the entire house what sort of Brexit should be delivered," said Matt Cairns, rates strategist at Rabobank. "This is adding to the positive tone in the market."

Germany's 10-year government bond yield rose six basis points to hit 0.008 percent, its first positive reading since March 25 when expectations of further monetary easing from the European Central Bank pushed it into negative territory. It was last seen at -0.02 percent. British government bond yields rose as much as seven basis points as investors reduced their holdings of safe assets following Prime Minister Theresa May's announcement that she was seeking cross-party talks to resolve the political impasse over Brexit.

Markets were also lifted overnight by hopes of progress in China-U.S. trade talks, and stronger data earlier this week. Asian shares rose to seven-month highs, while oil approached the key $70 per barrel mark. The United States and China "expect to make more headway" in trade talks this week, White House economic adviser Larry Kudlow said on Tuesday, while the Financial Times reported that Chinese and U.S. officials have resolved "most of the issues" standing in the way of a trade deal.

U.S. Treasury yields were 4 basis points higher in European trade to 2.52 percent having risen over 10 basis points this week. The turn in sentiment boosted euro zone government bond yields above from the 2-1/2 year lows seen last week after ECB President Mario Draghi said the central bank was considering ways to alleviate pressure on banks.

Most 10-year yields in the bloc were up to 4 basis points higher with appetite not even dampened by dour business activity in the euro zone. IHS Markit's Euro Zone Composite Final Purchasing Managers' Index (PMI), considered a good measure of overall economic health, dipped to 51.6 in March from February's 51.9.

Italian government bond yields meanwhile fell after better than expected data showed Italy's service sector expanded in March at its fastest rate since last September. The data provides some hope that the euro zone's third-largest economy could soon exit the shallow recession it fell into at the end of last year.

Italy's 10-year bond yield fell four basis points to 2.49 percent, while its two-year yield fell over six basis points to 0.52 percent,. (Reporting by Virginia Furness; Editing by Catherine Evans)