UPDATE 1-Euro zone bond markets give cautious welcome to U.S.-China trade progress

* German yields little moved in quiet session

* U.S.-China trade negotiators appear to make progress

* Italian yields fall further from 2% level

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds chart)

LONDON, May 8 (Reuters) – Euro zone government bond yields edged lower on Friday, reflecting some caution about U.S. and Chinese representatives agreeing to strengthen cooperation to salvage a trade deal between the two countries.

The mood was more positive outside the core part of the market, where Italian borrowing costs fell on the prospect of more countries relaxing lockdowns introduced to fight the spread of the coronavirus.

Government bond markets have had a volatile week.

There has been hefty issuance of new bonds to fund coronavirus stimulus plans and a German constitutional court ruling threatened to jeopardise one of the European Central Bank’s bond-buying programmes unless it can show it is needed.

That worried investors about the future of the ECB’s emergency purchase scheme and sparked a sell-off in Italian debt, which is dependent on ECB purchases to keep borrowing costs down.

But on Friday the market was calm, as investors digested news that U.S. and Chinese trade representatives discussed their Phase 1 trade deal on Friday, with China saying they agreed to improve the atmosphere.

Jan von Gerich, a fixed income analyst at Nordea, said he believed the market was overly optimistic about the deal.

“When it comes to (U.S. President Donald) Trump, everything is uncertain … But it will be very difficult for China to hold in this environment to those commitments in the trade agreement,” he said, referring to the economic hit China faces from the fight against the coronavirus outbreak.

The German 10-year yield was unchanged on the day at -0.548% . Other core euro zone yields fell 1 to 2 basis points.

On the economic data front, the big news of the day will be U.S. payrolls figures which are expected to show the American economy has lost the most jobs since the Great Depression.

But analysts said backward-looking economic data was mostly ignored by bond markets, with much more interest in the speed at which lockdowns are lifted and evidence of when an economic recovery would take hold.

“It seems at least in the euro zone that economic data is not the main driver and there’s more interest on the political front,” von Gerich at Nordea said.

Italian yields dropped and led a broad fall in borrowing costs across the peripheral countries.

The 10-year yield was down 6 basis points at 1.84% having earlier touched 1.8%, pulling it further away from the 2% level it hit earlier this week. Some economists say borrowing costs above 2% start to throw Italy’s debt sustainability into danger.

Shorter-dated Italian debt yields also dropped, with the two-year yield at 0.687%, 9 basis points lower on the day.

The Spanish 10-year yield fell 3 basis points to 0.858% .

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