January 21, 2019 / 11:45 AM / a month ago

UPDATE 2-German bond selloff pauses as Chinese growth hits 28-year low

* China’s 2018 growth slowed as expected to 28-yr low

* German 10-year yield comes off one-month high

* Spain picks lead arrangers for 10-year euro syndication

* Other core euro zone yields flat to lower on day

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates pricing, adds detail on Spanish bond sales.)

By Abhinav Ramnarayan

LONDON, Jan 21 (Reuters) - German government bond yields edged lower on Monday as signs of an economic slowdown in China, Washington’s political deadlock and Brexit worries kept investors wary and strengthened the demand for safe assets such as Bunds.

The most potent of these was the confirmation that China’s economic growth cooled slightly in the fourth quarter from a year earlier, leaving 2018 growth the weakest in 28 years.

Signs of further cooling in China — which has generated nearly a third of global growth in recent years — are stoking worries about risks to the world economy and weighing on profits for firms ranging from Apple to big carmakers.

“The Chinese data, while there are some positives on the retail and industrial production side, is just confirmation the Chinese economy is also slowing and adds to the ongoing economic pessimism,” said DZ Bank analyst Sebastian Fellechner.

“You add to this the ongoing government shut down and the uncertainty over Brexit, the mix of all these negative headlines is contributing to the movement in Bunds.”

Eurozone bond yields were largely unchanged as UK Prime Minister Theresa May addressed parliament about Brexit on Monday afternoon.

German 10-year government bond yields, the benchmark for the region, turned flat on the day during the address to around 0.26 percent, coming off a one-month high of 0.276 percent hit on Friday.

Other euro zone yields were largely flat to half a basis point lower on the day.

GROWING HOPES

That 10-year Bund yield last week recorded its biggest weekly rise since early November on growing hopes that Britain was heading towards a “soft Brexit”, boosting sterling and curbing the safety bid for Bunds.

But that optimism has taken a hit since.

Sterling inched lower against the dollar and the euro on Monday while British government bond yields slipped to session lows as May outlined the Plan B of her European Union divorce deal to parliament.

Sterling traded almost 0.2 percent lower at $1.2847 versus around $1.2860 just before May’s speech while against the euro it weakened to 88.415 pence compared to 88.340 pence earlier ,.

With U.S. markets closed for Martin Luther King Jr. Day, there was no trading in U.S. Treasuries and any reaction to news would likely filter through on Tuesday.

Greek 10-year government bond yields inched lower to a fresh one-month low of 4.15 percent, after S&P Global late on Friday set a positive outlook for Greek debt, suggesting an upgrade within the next 12 months.

Investors will keep a close eye on Thursday’s European Central Bank meeting to see if policymakers will react to worsening global economic prospects, yet analysts suggested it may be too early for a change in policy direction.

“It will be hard for the ECB to surprise on the dovish side ... At best one could hope for more hints regarding future TLTROs,” Mizuho strategists said in a note, referring to cheap ECB loans to banks called the Targeted Longer-Term Refinancing Operations (TLTROs).

Spain has mandated BBVA, Citi, Credit Agricole, HSBC, JP Morgan and Societe Generale as arrangers for a 10-year euro denominated syndicated bond which is expected to be launched in the near future.

The sovereign will also sell 1-2 billion euros of bonds at a scheduled auction on Tuesday.

Spanish 10-year bond yields were around 1.4 basis points higher on the day to 1.37 percent as trading eased off . (Reporting by Abhinav Ramnarayan; additional reporting by Virginia Furness; Editing by Raissa Kasolowsky and Ed Osmond)

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