February 21, 2019 / 8:16 AM / in 2 months

German bond yields near lows before euro zone PMIs released

* Business surveys expected to indicate subdued growth

* Commerzbank expects PMIs to undershoot market forecasts

* German bond yields hover around the 0.10 pct

* ECB’s Praet to speak, market looks for details on LTROs

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

By Abhinav Ramnarayan

LONDON, Feb 21 (Reuters) - Euro zone government bond yields hovered near recent lows before the release of a survey of euro zone businesses that is expected to confirm subdued growth in the region and keep demand for bonds strong amid optimism over U.S.-China trade talks.

A preliminary reading of the purchasing managers’ index (PMI) for February is due at 0900 GMT.

Similar readings for the euro zone’s two largest economies, France and Germany, will precede the region-wide number. Final January inflation figures for Italy are also due, at a time when economic prospects for the euro zone’s third largest economy look particularly bleak.

“Another set of weak euro area PMIs should renew ECB easing speculation and protect Bunds against latest U.S.-China trade optimism,” Commerzbank rates analyst Michael Leister said in a note.

“Our economists expect another notable decline to 50.0 for the manufacturing PMI in line with the consensus, but a major downside surprise in the services PMI,” he said.

In addition, Commerzbank believes the German manufacturing PMI may fall below 50, the threshold that separates expansion from contraction.

A Reuters poll suggests that market expectations are for a composite reading of 51.1 for euro zone PMIs.

So even though sources suggested to Reuters that United States and China have sketched the outlines of a deal to end their trade war, euro zone yields remain near their lowest in about two years.

German 10-year bond yields remained anchored at 0.10 percent, close to a recent 27-month low of 0.077 percent, and half what it was at the end of last year.

Economic growth in Europe has slowed considerably in recent months, with Germany narrowly escaping a recession at the end of last year. With concern mounting over potential U.S. tariffs on cars, it could be hit even harder.

Germany recorded the world’s largest current account surplus for the third year running in 2018. The country’s strong exports vex U.S. President Donald Trump and raise the risk of U.S. tariffs on German cars.

Also supporting the bid for bonds, the U.S. Federal Reserve on Wednesday signalled it would soon lay out a plan to stop letting go of $4 trillion in bonds and other assets.

European Central Bank chief economist Peter Praet is due to speak later on Thursday; his comments last week on potential cheap loans to euro zone banks boosted demand for southern European bonds, Italian debt in particular.

That said, Italian bond yields were 3 to 4 basis points higher across the curve ahead of the release of final inflation data.

Reporting by Abhinav Ramnarayan, editing by Larry King

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