UPDATE 2-German bond yield bounces off four-month low after positive PMI surprise

Australian dollars in Sydney, Friday, Jan. 15, 2016. (AAP Image/Joel Carrett) NO ARCHIVING

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By Yoruk Bahceli

LONDON, Feb 21 (Reuters) – Germany’s 10-year government bond yield bounced off four-month lows after a batch of business surveys delivered healthier-than-expected views of the euro zone economy.

First-estimate purchasing managers’ surveys showed the private sector in Germany, the bloc’s biggest economy, expanded at its fastest pace since August as growth in services activity made up for an easing recession in manufacturing. The coronavirus outbreak, however, may pose a threat to future exports.

Uncertainty stemming from the potential economic impact of the coronavirus outbreak has boosted demand for safe-haven bonds in recent weeks, while money markets have started to price a higher probability of a rate cut from the European Central Bank by the end of the year.

IHS Markit’s flash composite Purchasing Managers’ Index (PMI) for Germany, which tracks the manufacturing and services sectors that together account for more than two-thirds of the economy, beat the consensus forecast in a Reuters poll, although activity growth slowed on the previous month.

Business activity in France and the wider euro zone also expanded faster than expected in February, PMI surveys showed.

Ten-year German government bond yields fell to a four month low earlier on Friday at -0.46%, but bounced back up following the PMI release. They were last up 1 basis point at -0.44%.

The entire Dutch yield curve briefly returned to negative territory in earlier trade. The 30-year Dutch bond yield – the longest on the sovereign curve – fell to -0.012%, its lowest since Oct 10. It was last around 0.01%, down 2 bps points on the day.

The rise in yields following the data release was “tempered by the fact that we’ve got this ongoing issue that’s still developing,” said Rabobank strategist Lyn Graham-Taylor, as the situation around coronavirus has continued to evolve since the survey data was collected.

Should yields fall further, the German yield curve is next in line to return to negative territory, with the 30-year bond yield currently trading at 0.03%

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