January 28, 2020 / 10:01 AM / 23 days ago

UPDATE 2-European yields bounce off three-month lows after U.S. consumer confidence data

(Recasts, updates prices, adds bond sales)

By Olga Cotaga and Yoruk Bahceli

LONDON, Jan 28 (Reuters) - Euro zone government bond yields rose for the first time in over a week, bouncing off three-month lows thanks to strong U.S. consumer confidence data.

Yields rose sharply in late trading after U.S. consumer confidence exceeded expectations to hit its highest level since August.

“The conclusion of the trade deal has probably seen a bounce in that, even though there are still a lot of issues to be resolved,” said Rabobank strategist Lyn-Graham Taylor.

Most euro zone 10-year government bond yields, which had continued their fall earlier in the session, were last up 3 basis points on the day , set for their first daily rise in over a week.

Earlier in the session, the U.S. Treasury yield curve briefly inverted the first time since October.

The gap between yields on three-month U.S. notes and 10-year Treasuries fell as low as -0.015 basis points . It was last at 4 basis points.

An inverted curve, when longer-dated yields fall below shorter-maturity ones, has been a fairly reliable predictor of U.S. economic recessions in the past.

Investors have been dialling back riskier positions and buying bonds over the last week, worried about the coronavirus and the economic uncertainty it may lead to.

They have been betting inflation in the euro area will weaken. A key market gauge of long-term inflation expectations briefly fell to their lowest in 1-1/2-months at 1.2516%. It last bounced back to 1.27%.

“But the interesting part will be how much the virus and the contamination efforts of the Chinese government will finally lead to hamper supply chains and growth and that is really hard to grasp in the short term,” said DZ Bank rates strategist Christian Lenk.

Traders are also focusing on the Federal Reserve meeting which starts on Tuesday. The market consensus is that the central bank will keep interest rates unchanged at between 1.5% and 1.75%.

In the primary market, Greece gathered record orders over 18 billion euros for a 15-year bond issue that raised 2.5 billion euros - in its first time issuing such a long-term bond since the financial crisis.

The deal followed a credit rating to ‘BB’ from ‘BB-‘ by Fitch Ratings on Friday, citing economic growth and fiscal prudence were leading to government debt remaining at sustainable levels.

France’s 30-year bond sold via a syndicate of banks was also strongly received, with demand reaching 38 billion euros for the 5 billion euro offering, according to a lead manager memo seen by Reuters.

Reporting by Olga Cotaga and Yoruk Bahceli; Editing by Mark Potter and Nick Zieminski

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