German bond yields hit two-week lows yesterday as weaker-than-expected business activity data from the euro area eased concern that ultra-easy monetary policy in the bloc could end sooner rather than later.
Long-term borrowing costs across the single-currency bloc were down across the board after preliminary purchasing managers index numbers from France and Germany, and closed the day one to three basis points lower.
Across the eurozone, business growth slowed more than had been expected in February, but firms remained at the most optimistic in at least five-and-a-half years, a survey showed.
IHS Markit's composite flash PMI for the eurozone, seen as a good guide to economic health, fell to 57.5, below forecasts in a Reuters poll that had predicted a more modest dip to 58.5 from January’s final reading of 58.8.
German 10-year Bund yields fell four bps at one stage to a two-week low at 0.697 per cent before settling at 0.72 per cent.
They moved further away from a more than two-year high hit recently at around 0.81 per cent on speculation that robust economic growth would encourage the European Central Bank to pull back from its ultra-loose monetary policy stance soon.
“[The PMI data] are still good, but I think people were getting overexcited about their strength beforehand,” said Chris Scicluna, economic research head at London’sDaiwa Capital Markets.
“It might well be the case that people in the market were getting carried away about the strength of the recovery and what that means for the ECB.”
A rise in eurozone bond yields and the value of the euro is a natural reaction to the bloc’s strong economic performance and not an unwarranted market tightening, ECB policymaker Vitas Vasiliauskas said yesterday.
There was underperformance by Italian debt, reflecting uncertainty as a March election looms. The Italian/German 10-year bond yield gap hit 145 bps, close to its widest in around five weeks.
There was a firmer tone in other major bond markets. Jap-anese government bond yields fell in anticipation of strong demand at a 20-year-bond sale this week.
US Treasury yields steadied after rising on Tuesday as markets absorbed the first chunk of this week's supply deluge.
Minutes from the US Federal Reserve’s January meeting are in focus as investors assess the pace of 2018 rate hikes. “We expect the minutes to echo the more positive tone of the post-meeting statement on the economy and the FOMC’s increased confidence in reaching its inflation target,” analysts at UniCredit said.