Sluggish euro zone business growth data push bond yields lower

Mon Jun 23, 2014 7:07am EDT

* Surveys show private sector expansion slowing unexpectedly

* ECB signals low rates through to end-2016

* Bund yields fall close to 2014 lows (Updates prices, adds new quote)

By Marius Zaharia

LONDON, June 23 (Reuters) - Top-rated euro zone bond yields fell on Monday after business surveys showed a feeble and uneven economic recovery and the European Central Bank signalled interest rates will stay low until at least the end of 2016.

Expansion of the euro zone private sector unexpectedly slowed this month, according to Markit's Composite Purchasing Managers' Index (PMI). German activity kept expanding robustly but failed to meet investor expectations, while France's shrank at the fastest rate in four months.

"The softer-than-expected PMIs, especially in France, is why we have a bit of a bid," said Lyn Graham-Taylor, a rate strategist at Rabobank.

The data overshadowed upbeat Chinese manufacturing figures, which pushed yields higher in early trade.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, fell 2 basis points to 1.33 percent, within touch of 2014 lows of 1.285 percent. French, Finnish, Austrian, Dutch, Belgian and Irish yields also fell, while the rest were flat or slightly higher.

"German Bunds are expensive, but it's not easy to see a jump in yields with no inflation expectations and still depressed growth," ING rate strategist Alessandro Giansanti said.

Short-dated yields across the euro zone dipped after ECB President Mario Draghi told Dutch paper De Telegraaf that prolonging banks' access to unlimited liquidity up to the end of 2016 was a signal on rates.

His Austrian colleague Ewald Nowotny also said rates would only rise when growth picked up at a pace faster than 2 percent, which was unlikely to happen before 2016.

German two-year yields dipped 1 basis point to 0.03 percent, with other similar-dated yields in the euro zone falling 1-4 bps.

"Clearly Draghi wants to strengthen the forward guidance and he has put more flesh on the bones with those comments," said Jan von Gerich, chief fixed income analyst at Nordea.

CURVES

Natixis fixed income strategist Cyril Regnat said the ECB's stance and the poor economic data will force investors to switch into bonds with longer maturities in search for yield, flattening yield curves across Europe and especially in Germany.

"German 10-year Bunds are really expensive, but if we get inflation at 0.2 or 0.3 percent in June or July we can have even lower yields," Regnat said.

Other strategists say the ECB's ultra-easy policy stance will eventually foster growth and recommend investors to position for steeper curves. They say Bund yields might track moves higher in U.S. Treasuries and British gilts, as the Federal Reserve and the Bank of England prepare to change course on policy.

Rabobank's Graham-Taylor recommends investors to position for a wider yield gap between five- and 10-year Dutch bonds, with the five-year supported by the ECB outlook and the 10-years more sensitive to the Fed outlook.

Traders said profit-taking on this year's rally before the end of the quarter and debt sales from Italy this week were putting some selling pressure on peripheral debt.

Italy sells up to 3.5 billion euros of inflation-linked debt and zero-coupon bonds on Wednesday and medium- and long-term bonds on Friday. (Reporting by Marius Zaharia; Editing by John Sttonestreet/Ruth Pitchford)

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