LONDON: German bond yields steadied on Tuesday as surveys showed China's manufacturing sector in the grip of its worst slump in several years and oil prices eased back after a big surge.
The euro zone benchmark jumped about 7 basis points in the previous session as oil gained roughly 8 percent and consumer prices across the bloc defied expectations to hold onto 0.2 percent growth in August.
That eased disinflationary concerns before the European Central Bank's (ECB) policy meeting this week. But as global stocks wallowed in the wake of dismal purchasing managers' index readings on Tuesday which again raised fears about the health of China's economy, investor support for top-rated German bonds firmed.
Oil prices fell nearly 3 percent in Asian trading, giving up nearly half of the previous day's gains after OPEC said it was willing to talk to other producers to achieve reasonable oil prices and a downward revision to US output.
Strategists said the sharp swings in oil prices had caught investors off guard and had been magnified in a market where trading volumes were low because of a long weekend in Britain. "Bondholders can be forgiven for not knowing which head to stand on," Societe Generale strategist Ciaran O'Hagan said.
"More importantly, the latest volatility will be seen as a lesson by central bankers not to pay too much attention to market tantrums."
German 10-year yields were 1 basis point (bps) higher on the day at 0.80 percent, having briefly touched a new six-week high of 0.81 percent. But the moves were small compared to Monday's surge.
Most other lower-rated euro zone equivalents were 1-4 bps higher on the day.
Global central bankers - speaking at a conference in Jackson Hole, Wyoming over the weekend - played down the impact of a slowing China on their economies.
One of the fears is that reduced consumption from China will put downward pressure on already depressed oil prices and keep consumer price growth muted.
Against this backdrop, Monday's surge in the oil price and better-than-expected inflation data in the bloc have eased the pressure on the ECB for further action.
While it is broadly expected to revise down its inflation forecasts at a policy meeting on Thursday, the argument for additional easing measures is waning.
"Yesterday's sudden sell-off in the Bund future and aggressive oil rally suggests disinflation concerns are taking a back seat," Commerzbank wrote in a note to clients.
The big unknown for investors, however, is whether the United States will raise interest rates for the first time in nearly a decade this month - a move that would reverberate across global markets.
With this on the horizon, a US manufacturing survey due later on Tuesday will be closely watched ahead of the all-important labour data due on Friday.
In primary markets, Austria sold 1.3 billion euros of bonds maturing in 2025 and 2020 on Tuesday.
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