Euro zone yields hover near two-week highs as risk appetite swells

By Amanda Cooper and Lucy Raitano

LONDON, Oct 27 (Reuters) - Euro zone bond yields hovered near their highest levels in two weeks on Monday, as an apparent cooling in trade tensions between the U.S. and China drew investors away from safe-haven markets and into assets like equities and crypto.

A recent run of positive economic indicators out of the euro zone is also supporting sentiment.

Benchmark German 10-year Bund yields DE10TY=RR earlier touched their highest level since October 14 and were last flat at 2.62%. Yields have risen for four days in a row, the longest such stretch since early September, as investors have grown increasingly confident that the U.S. and Chinese governments will iron out their disputes over trade and as quarterly earnings paint a picture of fairly robust corporate health.

The delayed release of U.S. consumer price data on Friday showed inflation rose less than expected in September, leaving intact expectations for the Federal Reserve to cut interest rates by a quarter of a percentage point this week, but giving stock market bulls encouragement that price pressures are contained.

ECB EXPECTED TO LEAVE RATES UNCHANGED

A slew of monetary policy decisions aside from the Fed are scheduled this week, including from the Bank of Japan, Bank of Canada and the European Central Bank.

The ECB is widely tipped to leave rates unchanged. Markets show traders do not expect any more changes from the ECB for the next year, although ECB officials expressed caution around risk build-ups in financial markets, as stocks, gold and crypto hover at, or around, record highs.

"Our economists think ECB President (Christine) Lagarde will again describe policy as "in a good place" and will be watching whether she maintains the net hawkish tone that she struck in July and September," Deutsche Bank strategist Jim Reid said in a note.

Two-year German yields DE2YT=RR were steady around a two-week high of 1.99%, having staged their biggest daily rise since July on Friday. That move followed business activity surveys that showed momentum in the euro zone picked up more than expected in October, while Germany's private sector saw its largest rise in activity in more than two years.

Christian Reicherter, an analyst at DZ Bank, flagged Monday's release of the German business climate index, the Ifo survey, which showed business morale in the euro zone's largest economy rose in October.

"That came in quite a bit on the positive side and I think that could be one driver of the latest yield increase in Germany," he said.

Reicherter expects no change at the ECB's meeting on Thursday, in line with market expectations, and is already looking ahead to the next one.

"The December (ECB) meeting could be really quite interesting because of the new projection for the inflation in GDP data. We in our forecast still expect the ECB to lower interest rates one more time and that could happen in December," he said.

Meanwhile, French yields ticked down 1.2 basis points to 3.42% for 10-year paper FR10YT=RR, after Moody's on Friday left its rating of French debt unchanged, but revised its outlook to "negative" from "stable".

In terms of new government bond supply, Germany, Belgium and Italy will auction new debt this week. Commerzbank estimates supply will account for some 25 billion euros ($29.16 billion), up from around 6 billion euros last week, which might lift yields.

($1 = 0.8575 euros)