January 24, 2020 / 8:02 AM / a month ago

Euro zone bond yields inch up, focus turns to PMI data

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Jan 24 (Reuters) - Euro zone bond yields edged up from multi-week lows on Friday, as focus turned to the release of key business activity data for the latest clues to the economic outlook.

News that the World Health Organisation has declared the new coronavirus an emergency for China but stopped short of declaring it an epidemic of international concern appeared to bring some calm to world markets.

On Thursday, yields across the bloc fell sharply as fears of the flu-like virus rattled world markets, while European Central Bank President Christine Lagarde said that risks to the euro zone economy remain tilted towards the downside.

In early trade, yields on higher-rated bonds were up 1-2 basis points on the day. Germany’s benchmark 10-year Bund yield was up around 1.5 bps at -0.29%, above a six-week low hit on Thursday at around -0.31%.

France’s 10-year bond yield, which fell decisively back below 0% this week, was 2 bps higher at -0.05%.

The purchasing managers’ index (PMI) — widely viewed as a forward-looking indicator of growth is released this session.

Britain’s January PMI index is also in focus as investors assess whether or not the Bank of England will cut rates at next week’s policy meeting.

In Italy, 10-year bond yields were up 1.5 bps at 1.27% , having tumbled to their lowest levels since mid-November on Thursday.

They are down 12 bps this week and set for the biggest weekly falls in six weeks as investors brush aside near-term political risks.

A regional election this weekend in Emilia Romagna sees the right-wing League threatening to end 75 years of uninterrupted rule by the Democratic Party (PD) — a member of the ruling coalition.

A strong showing for the League could further underscore the frailty of the coalition government, which this week took a hit after Luigi Di Maio, leader of the co-ruling 5-Star Movement, stepped down.

Analysts say that even a strong showing for the League in regional elections was unlikely to lead to the collapse of the government with the two ruling parties unlikely to want to face fresh elections.

“The risk of losing national elections to right-wing Matteo Salvini is the glue that keeps the coalition together,” analysts at Berenberg said, referring to the League’s leader.

“Luigi di Maio’s resignation as leader of 5-Star may make the party even more eager to cling on to power in order to avoid a potentially disastrous defeat in snap elections.” (Reporting by Dhara RanasingheEditing by William Maclean)

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