LONDON: German bond yields dipped on Thursday on relief that the United States managed to offload bonds at auction, allaying some concerns that a combination of waning demand from China and an upcoming US rate hike may have put investors off.
The rally across euro zone markets mirrored a move seen in US Treasuries late on Wednesday after United States, the world's largest economy, sold $21 billion of 10-year bonds.
A failed auction of similar German debt, also on Wednesday, had stoked concern that demand from China for top-rated debt was shrinking as it pared back its foreign exchange reserves to shore up its currency.
But that same slowdown in China has reduced the chances that the Federal Reserve will hike interest rates for the first time in nearly a decade next week. Markets are now pricing a rougly 30-percent chance of a hike, down from more than 50-percent seen last month before China devalued the yuan to support growth.
A sale of US 30-year debt later on Thursday will provide another big test for the market, especially as short-dated yields are at their highest levels since 2011.
"Are they going to hike, are they not?" DZ Bank head of rates research, Christoph Kutt, said.
"There is a lot of nervousness ahead of the Fed's meeting next week, so markets are swinging up and down albeit in a fairly tight range." A new slide in Asian equities, after lacklustre Chinese and Japanese economic data further exacerbated worries over slackening global growth, and bolstered demand for the euro zone's top-rated debt.
China's consumer inflation in August edged up, but producer prices dropped for the 42nd straight month while Japan's main gauge of capital spending unexpectedly fell for a second straight month in July.
German 10-year yields - the euro zone benchmark - fell 1 basis point (bps) to 0.70 percent, retreating from weekly highs of 0.72 percent hit on Wednesday after the country's bond auction received fewer bids than the amount on offer meaning it was a technical failure.
Lower-rated bond yields in Italy, Spain and Portugal were flat to a touch higher on the day.
But while the flight-to-quality stoked demand for bonds, demand for the asset class could be easing from certain corners.
Data on Monday showed China's foreign exchange reserves fell the most on record in August, reflecting its attempts to halt a slide in the yuan and stabilise financial markets after its surprise devaluation of the currency last month.
Before the auction of 30-year paper from the United States later on Thursday, Ireland sold 1 billion euros of 15-year debt.
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