February 21, 2018 / 9:42 AM / a month ago

UPDATE 3-PMI data brings wave of relief to fretful bond markets

* Bond yields fall after French, German PMI data

* PMIs weaker than expected, but still at high levels

* Fed January meeting minutes due

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

By Dhara Ranasinghe

LONDON, Feb 21 (Reuters) - German bond yields hit two-week lows on Wednesday as weaker-than-expected business activity data from the euro area eased concern that ultra-easy monetary policy in the bloc could end sooner rather than later.

Long-term borrowing costs across the single-currency bloc were down across the board after preliminary purchasing managers index numbers from France and Germany, and closed the day about 1 to 3 basis points lower.

Across the euro zone, business growth slowed more than expected in February but firms remained at the most optimistic in at least 5-1/2 years, a survey showed.

IHS Markit’s composite flash PMI for the euro zone, seen as a good guide to economic health, fell to 57.5, below forecasts in a Reuters poll that had predicted a more modest dip to 58.5 from January’s final reading of 58.8. .

German 10-year Bund yields fell 4 bps at one stage to a two-week low at 0.697 percent, before settling at 0.72 percent .

They moved further away from a more than two-year high hit recently at around 0.81 percent on speculation that robust economic growth would encourage the European Central Bank to pull back from its ultra-loose monetary policy stance soon.

“They (the PMI data) are still good, but I think people were getting over-excited about their strength beforehand,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

“It might well be the case that people in the market were getting carried away about the strength of the recovery and what that means for the ECB.”

A rise in euro zone bond yields and the value of the euro is a natural reaction to the bloc’s strong economic performance and not an unwarranted market tightening, ECB policymaker Vitas Vasiliauskas said on Wednesday.

There was some underperformance by Italian debt, reflecting uncertainty as a March 4 election looms. The Italian/German 10-year bond yield gap hit 145 bps, close to its widest in around five weeks.

There was a firmer tone in other major bond markets. Japanese government bond yields fell in anticipation of strong demand at a 20-year-bond sale this week.

U.S. Treasury yields steadied, after rising on Tuesday as markets absorbed the first chunk of this week’s supply deluge.

Minutes from the U.S. Federal Reserve’s January meeting are due later in the day and are in focus as investors assess the speed and pace of U.S. rate hikes this year.

“We expect the minutes to echo the more positive tone of the post-meeting statement on the economy and the FOMC’s increased confidence in reaching its inflation target,” analysts at UniCredit said in a note.

“This sets the stage for further rate hikes, with the next one likely to come in March.”

Reporting by Dhara Ranasinghe; Editing by Toby Chopra

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