Euro zone bonds mostly weaker after PMI data

Mon Mar 24, 2014 6:34am EDT

* French PMI highest in 1-1/2 years, German PMI eases

* ECB's Liikanen dovish comments supports market

By Emelia Sithole-Matarise

LONDON, March 24 (Reuters) - Euro zone government bond prices were mostly lower on Monday after data showed a surprise return to growth in French business activity and suggested the bloc's economic recovery is more broadly based than previously thought.

A survey showed business activity in France, the currency bloc's second-biggest economy, grew in March at the fastest pace in more than 2-1/2 years, defying forecasts for a further contraction.

Similar purchasing managers index (PMI) data for Germany showed its private sector slowed in March, but the overall composite index showed broader growth in the euro zone.

"The market reacted promptly to the upside surprise in French PMIs but Germany is little bit weaker than expected so we are seeing a bit of a rebound and a limited setback in the market," said Patrick Jacq, a strategist at BNP Paribas.

German 10-year yields were 1.2 basis points up up at 1.65 percent, while French, Dutch and Austrian yields were also higher.

Comments by European Central Bank Governing Council member Erkki Liikanen that the bank would keep interest rates low well into the euro zone recovery tempered the rise in yields. Liikanen cited high unemployment and the fact that many factories are running well below capacity. [ID:nL6N0MI2TN}

German yields have pulled back from two-week highs hit last week after U.S. Federal Reserve chair Janet Yellen surprised markets by suggesting an interest rate hike could come earlier than many in the market were expecting.

Although euro zone money markets have all but priced out expectations of an ECB interest rate cut in coming months, the bank is seen keeping monetary policy ultra-easy with inflation seen remaining at ultra-low levels.

"We still think European outperformance on a cross market basis should continue given the diverging central bank outlooks, with the Fed on one side and the ECB on the other remaining accommodative," a trader said. (Editing by Catherine Evans)

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