LONDON: Top-rated German bond yields rose on Tuesday as investors favoured riskier stocks after weak Chinese data fanned hopes for more monetary stimulus.
Markets were seen in "risk on" mode after data showed that China grew at its slowest rate in a quarter of a century in 2015 and industrial and retail sales data missed forecasts.
Further evidence of a slowdown in the world's second-largest economy not only firmed bets of a policy response from Beijing but also upped the pressure on the European Central Bank to protect the euro zone's fledgeling recovery from China's malaise.
A survey on Tuesday showed that the mood among German analysts and investors darkened in January as worries about China and other emerging markets continued to hit Europe's largest economy.
"We've had a number of days of very poor risk appetite and now that is rebounding, so the market is taking profits on strong bond gains since the start of the year," Mizuho strategist Peter Chatwell said.
German 10-year bond yields, viewed as a safer haven in times of market turmoil, rose 2.5 basis points (bps) to 0.49 percent , while yields were slightly higher across the euro zone.
Euro zone stocks rallied more than 2 percent, tracking an earlier rise across Asian shares.
ECB policymaker Ilmars Rimsevics said on Monday that Europe was too relaxed about the prospect of contagion from China.
It could result in sagging demand for European exports while further easing from China should weaken the yuan and serve to export China's deflationary pressure.
This is a big headache for the ECB, which is struggling to boost inflation that has been tugged down by another slide in oil prices.
Long-term inflation expectations as measured by five-year, five-year breakeven forwards are at their lowest levels since early October, at about 1.6 percent.
The measure, which shows where markets expect 2026 inflation forecasts to be in 2021, has fallen more than 20 bps since the December highs. It is now less than 10 bps above troughs hit in January 2015, a week before the ECB announced quantitative easing.
Financial markets see roughly a 50 percent chance that the ECB will cut interest rates further at its March meeting. Though China is likely to be discussed at length at Thursday's ECB meeting, markets do not expect more stimulus to be announced.
"While it seems very difficult to imagine a scenario where any action will be taken, the analysis of the situation since the last meeting is likely to be bleak," RBC strategist Peter Schaffrik said.
Elsewhere, Finland sold at auction about 1.5 billion euros of bonds maturing 2020 and 2042.
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