February 21, 2018 / 8:25 AM / a month ago

Euro zone bond yields dip as debt markets find firmer footing

* Bond yields dip as markets find firmer ground

* PMI data in focus

* Fed Jan meeting minutes also due

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Feb 21 (Reuters) - Borrowing costs across the euro area dipped on Wednesday, moving further away from recent multi-year highs as bond markets found a firmer footing from a recent heavy selloff.

Data showing business activity in France cooled more than expected in February provided some reassurance to bond investors fretting that the days of ultra-loose monetary policy in the bloc could end much sooner than anticipated.

Data compiler IHS Markit said its preliminary composite purchasing managers index (PMI) for France fell to 57.8 from 59.6 in January, slipping to the lowest point since October.

The reading fell short of economists’ average expectations for 59.4 although it remained well above the 50-point threshold demarcating an expansion from a contraction.

“What we are seeing is a stabilisation in core government bond markets,” said Commerzbank rates strategist Rainer Guntermann. “The PMI readings today should help markets stabilise further.”

In early trade, 10-year bond yields across the bloc were down around 1-2 basis points.

Germany’s benchmark Bund yield dipped 2 bps to 0.72 percent , comfortably below a near 2-1/2 year peak hit earlier this month around 0.81 percent.

There was also a firmer tone in other major bond markets, while Japanese government bond yields fell in anticipation of strong demand at a 20-year bond sale this week.

U.S. Treasury yields were also steadier having risen on Tuesday as markets absorbed the first chunk of this week’s supply deluge.

The amount of Treasury issuance is the second largest ever over a three-day period, falling $1 billion short of the all-time record high set in August 2010, according to Wrightson ICAP chief economist Lou Crandall.

The Treasury Department has ramped up its borrowing on the open market in anticipation of a higher deficit from last year’s major tax overhaul and a two-year budget deal that will increase federal spending over the next two years.

Minutes from the U.S. Federal Reserve’s January meeting are due for release later in the day and are another key focus for investors trying to assess the speed and pace of U.S. rate hikes this year.

“We expect the minutes to echo the more positive tone of the post-meeting statement on the economy and the FOMC’s increased confidence in reaching its inflation target,” analysts at UniCredit said in a note.

“This sets the stage for further rate hikes, with the next one likely to come in March.” (Reporting by Dhara Ranasinghe; Editing by Catherine Evans)

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