Euro zone yields drop as German business morale falls

LONDON: Euro zone government bond yields dropped on Thursday after a survey showed German business confidence fell in February, offsetting an earlier rise in yields after the minutes of the last Federal Reserve meeting revived fears of inflation.

German business confidence fell more than expected in February but remained high, a survey showed on Thursday, suggesting that Europe's biggest economy is set for solid growth in the first quarter of this year.

Euro zone government bond yields, having been higher in early trade, fell 1 to 2 basis points across the board after the release. US Treasury yields, which had hit multi-year highs overnight, also dropped to 2.92 percent, 4 bps off Wednesday's peak.

In addition, minutes of the European Central Bank's last meeting are due later on Thursday.

"The bear-steepening US Treasury curve highlights the spillover risks for European government bonds," Commerzbank analysts said in a note. "Yet Bunds should stabilise further in a 10-year yield range of 0.70-0.75 percent."

German 10-year bond yields, the benchmark for the region, initially rose up to 0.75 percent before dropping to 0.71 percent. Most other high-grade bond yields were 1 to 2 bps lower as well.

The "transatlantic spread" between German and US 10-year borrowing costs widened to near a yearly high at 220 bps on Thursday, reflecting the diverging monetary policy expectations between the two countries.,

GREEK SURPRISE

Greek government bonds were in demand, with yields dropping following after Moody's moved overnight to upgrade Greece two notches from "Caa2" to "B3" and maintained its positive outlook. The agency said it believed Greece will return to self-sufficiency and market-based funding.

Greece has also been upgraded by S&P Global and Fitch recently, but Moody's was not due to review Greece's rating until later.

"It came as a surprise in terms of the timing - but the overall rating story and economic story on Greece is on track," said DZ Bank analyst Sebastian Fellechner.

The yield on Greece's 10-year government bond was 14 basis points lower at 4.34 percent. Short-dated Greek 2-year government bond yields dropped as much as 35 basis points to a 10-day low of 1.51 percent .

The closely watched German IFO survey of business climate is due to be published later on Thursday. The ECB minutes are due at 12.30 GMT.