Euro zone bond yields up; PMI suggests worst may be over for economy

• The euro zone-wide PMI showed business activity remained weak, although there were some signs that the worst may be over.
• Germany's 10-year Bund yield was up around 1.5 basis points  at -0.28pc, above the six-week low around -0.31pc reached on Thursday.
• France's 10-year bond yield, which fell below 0pc this week, was 1.5 bps higher at -0.04pc.

LONDON: Euro zone bond yields edged up from multi-week lows on Friday as data suggested that business activity in Germany had picked up in January and anxiety ebbed over the spread of a deadly virus in China.

IHS Markit's flash composite Purchasing Managers' Index (PMI), which tracks the manufacturing and services that account for more than two-thirds of Germany's economy, rose to 51.1 from 50.2 the previous month.

It was the highest reading in five months, suggesting Europe's largest economy may be picking up at the start of 2020.

The euro zone-wide PMI showed business activity remained weak, although there were some signs that the worst may be over.

"There are some encouraging numbers in this PMI release which confirm there is some growth recovery in the making," said Bert Colijn, senior economist for the euro zone at ING, in a note.

In addition, the World Health Organisation declared the new coronavirus an emergency for China but stopped short of declaring it an epidemic of international concern. That helped calm world markets, tempering demand for safe-haven bonds.

Germany's 10-year Bund yield was up around 1.5 basis points  at -0.28pc, above the six-week low around -0.31pc reached on Thursday, when the China virus fears gripped markets and European Central Bank chief Christine Lagarde sounded a more dovish tone than expected after the ECB's January meeting.

It is ridiculous to believe ECB policy is on auto-pilot and that it won't change until a year-long review of ECB strategy is completed, Lagarde said on Friday.

France's 10-year bond yield, which fell below 0pc this week, was 1.5 bps higher at -0.04pc.

"The bond market is seeing a bit of a retracement of just how far the move went yesterday and reflects a little less risk around the virus worries," said Mizuho rates strategist at Henry Occleston.

In Italy, 10-year bond yields were steady around at 1.25pc , having tumbled to their lowest levels since mid-November on Thursday.

They are down 13 bps this week and set for the biggest weekly decline in six weeks as investors brush aside near-term political risks.

In a regional election this weekend in Emilia Romagna, the right-wing League threatens to end 75 uninterrupted years of rule by the Democratic Party (PD), which is part of Italy's coalition government.

A strong showing by the League, led by Matteo Salvini, would underscore the frailty of the coalition, which was undermined this week when Luigi Di Maio, leader of the co-ruling 5-Star Movement, stepped down.

Analysts say that even a strong showing for the League in  regional elections was unlikely to lead to the collapse of the government, since the two ruling parties were unlikely to want to face fresh elections.

"A win for Lega would likely be short-term bearish for BTPs, but without a national election that could propel Salvini to the premiership it's not clear that the bearish move could be sustained on such a result alone," said Deutsche Bank strategist Jim Reid.