LONDON: German bond yields fell to two-week lows on Wednesday as weaker-than-expected business activity data from the euro zone's two biggest economies eased concern that ultra-easy monetary policy in the bloc could end sooner rather than later.
In fact, long-term borrowing costs across the single-currency bloc were down 2 to 4 basis points after preliminary purchasing managers index numbers from France and Germany.
IHS Markit's flash composite German PMI, which tracks the manufacturing and services sectors that account for more than two-thirds of the economy, fell to 57.4, dow down January's 59.0, its highest in nearly seven years.
The preliminary composite PMI for France fell to 57.8 from 59.6 in January, slipping to its lowest point since October.
The French reading fell short of economists' average expectations for 59.4, although it remained well above the 50-point threshold that separates expansion from contraction .
German bond yields fell 4 bps to a two-week low at 0.697 percent, leading a fall in borrowing costs across the bloc.
They moved further away from a more than two-year high hit earlier this month at around 0.81 percent, as speculation grew that economic growth would encourage the European Central Bank to pull back from its ultra-loose monetary policy stance soon.
"They (the PMI data) are still good, but I think people were getting over-excited about their strength beforehand," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.
"It might well be the case that people in the market were getting carried away about strength of recovery and what that means for the ECB."
There was some underperformance by Italian debt, reflecting uncertainty as a March 4 election looms. The Italian/German 10-year bond yield gap was close to its widest in around five weeks.
There was a firmer tone in other major bond markets. Japanese government bond yields fell in anticipation of strong demand at a 20-year-bond sale this week.
US Treasury yields steadied, after rising on Tuesday as markets absorbed the first chunk of this week's supply deluge.
Minutes from the US Federal Reserve's January meeting are due later in the day and are another focus for investors trying to assess the speed and pace of US 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."
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