German bond yields rise to one-week high after positive PMI surprises

AMSTERDAM: Germany's 10-year bond yields rose to their highest in a week on Wednesday as data pointed to better-than-expected business activity in the euro zone this month, denting demand for safe-haven assets.

Euro area business activity nearly returned to growth in December, Markit's preliminary purchasing managers' index indicated on Wednesday, while services sector contraction slowed sharply and manufacturing growth accelerated. All three indicators showed much higher activity than a Reuters poll had predicted.

More optimism came on the Brexit front, as the EU's chief executive said on Wednesday she could not say if there would be a trade deal with Britain but there had been progress and the next few days would be critical.

Safe-haven German 10-year bond yields, which tend to rise on positive news on the economic outlook, were up as much as 3 basis points to -0.58%, to their highest in a week. They were also on course for their biggest daily rise in over two weeks.

Italy's 10-year bond yield was up 1 basis point to 0.49% after hitting a record low at 0.48% on Tuesday.

The underperformance of German bonds relative to Italy's pushed the closely-watched gap between the two countries' 10-year yields - effectively the risk premium on Italian debt - to a new low since early 2016.

Richard McGuire, head of rates strategy at Rabobank in London, said the PMIs, alongside Brexit optimism, were boosting risk appetite on Wednesday.

"It provides some hopes that the drag.. from lockdowns is going to be (better) than we saw during prior lockdowns."

The boost to risk appetite also pushed European shares to 10-month highs and the euro to its highest since April 2018.

But analysts caution not to read too much into the data, given that economies like Germany's have just implemented tighter lockdown measures.

Bert Colijn, senior economist, euro zone at ING noted the PMIs are "backward-looking as the severe lockdowns will have consequences for fourth quarter growth expectations and push them further into the red."

Germany's Ifo institute expects the country's economy to recover less strongly than expected next year due to the stricter lockdown measures that will close most stores.

In the primary market, Italy will conduct a buyback of five bonds due in 2021.

Later in the session investors will also focus on the outcome of the U.S. Federal Reserve meeting.