* Euro zone yields slip, German yields hit -0.6%
* Analysts say traders may be hedging any vaccine setback
* December manufacturing data signals euro zone rebound
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds latest prices)
LONDON, Jan 4 (Reuters) - Euro zone government bonds yields fell on Monday, as investors traded cautiously amid rising coronavirus cases in the region.
The market showed little reaction to surveys showing euro zone manufacturing activity increased at its fastest pace since mid-2018 in December.
Analysts said Monday’s market, in which safe-haven bond prices rose as riskier stock markets rallied when the two typically move inversely, was baffling.
“I have seen some commentary trying to explain the Bund rally by focusing on the rising Covid cases but then you see commentary explaining the rally in equities on vaccine hopes,” said Commerzbank’s Christoph Rieger, head of rates and credit research.
“The [German government bond] Bund strength is remarkable given equity strength and I think maybe some market participants just like to hold Bund duration as a hedge in case the vaccine turns out to be problematic.”
Investors are balancing optimism around the rollout of COVID-19 vaccines with concerns that rising infections could herald tighter restrictions.
Mizuho strategists said that with investors returning to the market after holidays “recent events should be quickly priced in”, referring to rising coronavirus cases in Europe and new travel restrictions.
Germany is set to extend its lockdown until Jan. 31 to curb the spread of the virus.
The benchmark 10-year German government bond yield fell 3 basis points to -0.601%.
Other core bond yields also fell by similar amounts .
In southern Europe, yields eased by 1 to 5 basis points. Spain’s 10-year bond yield weakened 3 basis points to 0.03% , while Portugal’s by 5 bps to 0.01%..
Italian longer-dated yields dropped around 1 basis point.
There was more positive economic news in Asia, where manufacturing surveys showed factory activity in the region continued to bounce back from the COVID-19 shock, although Chinese factory activity growth slowed in December.
Reporting by Tommy Wilkes; Additional reporting by Dhara Ranasinghe; Editing by Ana Nicolaci da Costa and Alexander Smith
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