February 14, 2019 / 8:18 AM / 8 months ago

Euro zone bond yields steady as Germany escapes recession

* Data shows Germany just escaped recession in Q4

* EZ bond yields up briefly on data

* Focus on Spain as snap election risk grows

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

By Dhara Ranasinghe

LONDON, Feb 14 (Reuters) - Euro zone government bond yields were mostly steady on Thursday, with data showing Germany just escaped recession in the final quarter of 2018 preventing a further drop in borrowing costs.

Bond yields in the bloc’s top-rated economies have fallen sharply this year as a string of weak economic data and cuts to 2019 growth forecasts prompted investors to reassess both the economic and monetary policy outlook.

But with negative news now priced into the market and benchmark German 10-year bonds yields trading close to their lowest levels in over two years, the bond market appeared to be on hold.

Germany’s economy grew by 0.0 percent quarter-on-quarter in the final quarter of 2018, data showed, compared with a Reuters forecast for growth of 0.1 percent. It escaped recession by the narrowest of margins after contracting in the July-September period for the first time since 2015.

“The whisper estimate was even lower, so that’s why the immediate reaction was a rise in yields,” said Norbert Wuthe, rates strategist at Bayerische Landesbank.

“There are basically two things weighing down yields at the moment — Brexit uncertainty and, in the past six weeks, increased attention to negative data surprises and their possible repercussions for the ECB (European Central Bank).

Germany’s 10-year Bund yield was last trading at 0.12 percent, little changed on the day, having briefly risen to 0.133 percent after the data.

Most other 10-year bond yields in the bloc were flat to marginally lower on the day .

Focus remained on Spain, where bond yields were broadly steady in early trade.

Spain’s parliament rejected a draft 2019 budget on Wednesday after Catalan separatists turned their back on the government, pushing the country close to an early national election.

“Elections would not concern us in the long-term, as whether they take place or not, there is still uncertainty either way,” said Peter McCallum, rates strategist at Mizuho.

He said snap elections would likely spark a sell-off in Spanish bonds, which should recover if fresh polls resulted in a centre-right coalition and a more market-friendly fiscal policy. (Reporting by Dhara Ranasinghe Editing by Alexander Smith)

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