May 23, 2019 / 8:01 AM / 5 months ago

UPDATE 4-German bond yields slide back towards 2-1/2 year lows on growth fears, Brexit uncertainty

* German 10-year bond yield slides towards 2-1/2 year low

* EZ PMI undershoots expectations, trade war hurts growth

* US, UK 10-year yield lowest since 2017 (Updates throughout, with price action, oil slide, ECB minutes)

By Virginia Furness and Dhara Ranasinghe

LONDON, May 23 (Reuters) - German 10-year bond yields fell back towards 2-1/2 year lows on Thursday as a fresh dose of disappointing economic news added to concern about the harmful impact of trade wars, with Britain’s political turmoil only fuelling demand for safe-haven debt.

It was another day of hefty yield falls, and sharp prices rises, across major bond markets. U.S. and British 10-year bond yields hit their lowest levels since 2017.

In the euro zone, IHS Markit’s May Flash Composite Purchasing Managers’ Index(PMI), a good guide to economic health, nudged up to 51.6 from a 51.5 in April, but was below market expectations for 51.7.

French business activity jumped to its strongest level in six months, but German business activity undershot expectations. Business morale in Germany — Europe’s biggest economy — also deteriorated more than expected in May, the Ifo institute survey indicated.

“The weak euro zone PMI and the German Ifo survey, which was particularly poor, flag concern that any growth rebound in Q1 was likely temporary,” said Chris Scicluna, head of economic reserach at Daiwa Capital Markets.

Germany’s 10-year government bond yield fell 4 basis points to minus 0.12%, within striking distance of 2-1/2 year lows of minus 0.132% hit last week and set for its biggest one-day fall in over two weeks.

It has been a dismal few months for the global economy with the trade conflict sending a shiver through markets and chilling business activity across the world.

Europe in particular has seen its recovery sputter and Germany’s industrial sector has gone into reverse.

European Central Bank policymakers are concerned that economic growth in the bloc is even weaker than feared, the accounts of their April 10 meeting showed on Thursday.

Anyone hoping the data will prompt a change in European Central Bank policy will be disappointed, said Commerzbank rates strategist Rainer Guntermann.

“It is a mixed picture but the data for April is not weak enough for the ECB to revise down their GDP expectations ... and when the ECB council looks at the data flow ... overall it is still a mixed picture,” he said.

Still, there were some worrying signals from the bond market — the U.S. yield curve as measured by the yield gap between three month and 10-year notes inverted again in a sign that concern about the economic growth outlook is building.

Heightened uncertainty in Britain, where pressure was mounting on Prime Minister Theresa May to step down, added to demand for higher-rated bonds.

Ten-year U.S. Treasury yields tumbled to 2.32%, their lowest since December 2017. Britain’s 10-year bond yield fell to 0.95% — its lowest level since June 2017.

Tumbling oil prices, down over 4% in late trade, weighed on market inflation expectations — helping push down 10-year bond yields in the euro zone 2-3 bps on the day.

Reporting by Virginia Furness, Tommy Wilkes and Dhara Ranasinghe; Editing by Alison Williams

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