UPDATE 1-Euro zone government bond yields higher after Ifo index

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds comments, details.)

MILAN, Dec 18 (Reuters) – Euro zone bond yields extended early gains on Friday as a stronger-than-expected German business morale index weakened demand for safe-haven assets.

The Ifo institute index rose to 92.1 from an upwardly revised reading of 90.9 in November, an improvement Ifo linked mainly to manufacturers logging high volumes of orders and an improvement in export expectations.

“Ifo data confirmed the positive trend seen recently and is boosting yields across the euro area,” said Mauro Valle, head of fixed income at Generali Investments Partners. “We expect Bund yields to stay around these levels, maybe a bit closer to -0.5% from now to year-end, while we expect new directional bets in January.”

Germany’s 10-year bond yields rose to their highest in more than a week on Wednesday as data pointed to better-than-expected business activity in the euro zone this month.

“A correction is normal as year-end is approaching. I wouldn’t be surprised if a further slight rise in yields took place in the coming days,” said Anna Guglielmetti, head of institutional portfolio management Italy at Credit Suisse.

Expectations of a quick approval of a fresh stimulus package in the United States were already propping up risk sentiment. U.S. lawmakers from both parties said COVID-19’s worsening toll meant that failure to agree on a new round of aid was no longer an option.

German 10-year Bund yield was up 2 basis points, after hitting its highest since December 4 at -0.545%.

Italy’s 10-year BTP yield was up 3 basis points, after reaching its highest since Dec. 10, set for its biggest one-day rise since Dec. 1.

Vaccines and virus trajectories will be the main focus next year, according to analysts.

“Much of the positive risk trade rests with the promise of a sharp vaccine-led economic rebound in 2021 and beyond,” Deutsche Bank said in a research note.

What could reverse the risk-on trade is “a low-probability event: that the vaccines do not fulfil their promise of securing ‘herd immunity’ for much of the developed world into H2 2021,” the bank said.

UK 10-year government bond yields fell 1.5 basis point to 0.27% as Brexit turmoil continued.

European Union Brexit negotiator Michel Barnier said on Friday that “just a few hours” remained for negotiations to reach a new trade deal with Britain, with disagreements over fishing rights clouding the prospects of a deal.

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