* German IFO seen picking up for third straight month
* Bunds extend previous day’s falls after strong PMIs
By Emelia Sithole-Matarise
LONDON, July 25 (Reuters) - German 10-year bond yields held at their highest levels in over two weeks on Thursday before German business sentiment data expected to show an improvement on signs of recovery in the euro zone’s largest economy.
Bund prices slumped the previous day, driving yields up as investors cut exposure to low-risk debt after strong euro zone and U.S. business surveys suggested that future global monetary conditions could be tighter than investors previously expected.
The German IFO survey due at 0800 GMT is expected to maintain the upbeat trend and show business morale picked up for a third consecutive month in July.
Focus will also be on preliminary UK second quarter gross domestic product data likely to show an improving economy. A forecast-beating reading could also cool expectations of further monetary easing measures from the Bank of England.
“It’s a data-driven market at the moment and it feels a bit heavy,” a trader said. “The danger is we get a strong IFO number again and it continues to weigh on things. The other danger is UK GDP. Maybe there’s upside risk there as well so gilts may add to the bearish sentiment.”
German 10-year yields were up 0.6 basis points at 1.65 percent, near their highest since July 9, while Bund futures were last 8 ticks down at 142.64, after dropping more than a full point on Wednesday.
The yields have risen more than 10 bps this week but are still some 20 bps below peaks reached in June after the U.S. Federal Reserve outlined plans to start scaling back its massive bond purchases later this year.
“We like selling Bunds below 1.60 percent in yield, but we also did not see a sell-off of this pace coming, which we think illustrates more how thin the market currently is,” Credit Agricole strategists said in a note.
Bunds slightly lagged lower-rated Spanish and Portuguese debt whose yields dipped on growing anticipation that the euro zone’s weaker economies may be emerging from recession. Portuguese bonds were also supported by finance ministry figures showing the country’s public deficit ended the first half of the year well below a 6 billion euro ceiling set for the period under its international bailout.
Portuguese 10-year yields were 3 bps down at 6.57 percent and Spanish equivalents were 1 basis point lower at 4.64 percent.