LONDON: A decline in German bond yields levelled out on Tuesday after China took measures to halt a slide in its currency and stock market, offseting most of the impact of below-forecast euro zone inflation data.
German yields dipped 1 basis point (bps) to 0.56 percent, stabilising after Monday's 9-bps slide, when investors were looking for a safe haven amid geopolitical tensions and doubts about the health of China's economy.
Beijing injected liquidity into domestic markets, set the value of its yuan currency higher than many had expected and said it was studying rules to regulate share sales by major holders. There were also reports of direct intervention in markets by state-owned funds to try and halt equity rout.
Analysts said those actions looked like only a temporary fix after Monday's 7-percent drop in Chinese shares..
"China's actions are certainly positive at the margin ... but overall the risk is that it is interpreted as a signal of weakness that these ongoing struggles to stabilise the market by the authorities aren't really bearing fruit," Commerzbank strategist Michael Leister said.
The measures pushed Chinese shares up 0.3 percent on Tuesday. Euro zone stocks also rose 0.6 percent.
Lower-rated debt in Spain and Italy outperformed the German benchmark, with yields down 3-5 bps at 1.70 and 1.51 percent, respectively.
In Catalonia, one of Spain's richest regions, bond yields fell to a three-week low as a local separatist coalition fractured, potentially leading to new elections and delaying independence plans.
Spain's acting Prime Minister Mariano Rajoy said on Tuesday that a new regional election in Catalonia was inevitable.
INFLATION FRUSTRATION
Euro zone inflation data showed no sign that base effects from last year's slide in oil prices had faded away, creating more headaches for the European Central Bank. That kept up the downward pressure on yields.
Headline inflation was unchanged at 0.2 percent in December, missing expectations for a rise to 0.3 percent and far short of the bank's target of close to 2 percent. The core inflation rate - which strips out energy costs - fell to 0.8 percent from November's 0.9 percent.
"Yields are going to find it difficult to rise on the back of this (data) clearly," Credit Agricole strategist Orlando Green said.
Heightened tensions in the Middle East are also keeping investors cautious. Saudi Arabia cut diplomatic ties with Iran on Sunday after protesters stormed its embassy. The attack followed the Saudi execution of a prominent Shi'ite cleric, Nimr al-Nimr, which outraged predominately Shi'ite Iran.
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