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UPDATE 2-Euro zone yields fall as Trump speech brings investors back to bonds

By Yoruk Bahceli

* Euro zone periphery govt bond yields (Updates yields, adds Belgian 10-year bond)

By Yoruk Bahceli

LONDON, Nov 13 (Reuters) - Euro zone bond yields fell on Wednesday after U.S. President Donald Trump threatened China with further tariffs if it fails to sign a trade deal, dimming the optimism that has hurt bond markets in recent weeks.

Trump dangled the prospect of completing an initial trade deal with China "soon," but his speech on Tuesday offered no new details on negotiations.

He said tariffs would be raised on Chinese goods "very substantially" if China does not make a deal with the United States. "And that's going to be true for other countries that mistreat us too," he added.

Most 10-year bond yields fell 4 to 6 basis points on the day .

Benchmark 10-year German government bond yields saw their largest daily drop since June, down 6 basis points at -0.3%, compared with last week's five-month high of -0.22%.

Wednesday's bond rally pushed Germany's 20-year bond yield back into negative territory after it held positive for nearly a week. It was last at -0.0136%.

The Belgian 10-year bond also returned to negative, having traded in positive territory for a week. It was last yielding -0.005%.

DZ Bank's rates strategist Sebastian Fellechner said Trump's speech was the reason for lower yields.

He added that trade negotiations are the main trigger for the market right now and that revived trade worries confirm "yields should remain in the very negative area" given the high yields bonds have reached in recent sessions.

Bond yields in the euro zone have risen significantly in recent weeks as optimism about a U.S.-China trade deal made safe-haven government bonds less attractive investments.

Germany's 10-year benchmark yield is still up 8 basis points so far in November.

On the data front, euro zone industrial output figures came in better than forecast by a Reuters poll ahead of euro zone and German gross domestic product readings on Thursday.

Germany's economy contracted by 0.1% during the second quarter and a Reuters poll predicts it will have contracted by the same amount during the third quarter -- one of the key reasons behind pessimism on the euro zone economy.

Elsewhere, Italy bore the brunt of rising bond yields in its latest auction, where it paid the highest levels since July for three- and seven-year bonds and the highest since May for 30-year debt.

Italian bonds have underperformed euro zone peers this month, with profit-taking, doubts around the durability of its coalition government and a budget review by the EU pushing the country's 10-year yield up 28 basis points.

Spanish 10-year yields touched a new six-month high of 0.466%, extending the rise seen on Tuesday when the Socialists agreed a coalition with the far-left Unidas Podemos party.

They later slipped to trade at around 0.45%. (Reporting by Yoruk Bahceli and Elizabeth Howcroft, Editing by Larry King and Catherine Evans)