Euro zone government bond yields rise after positive economic indicators

Euro zone bond yields edged up by a few basis points on Wednesday after economic data pointed to a return to growth in the bloc, while investors remained broadly cautious as they waited for Washington to agree on a fiscal plan for the United States.

Euro zone bond yields edged up by a few basis points on Wednesday after economic data pointed to a return to growth in the bloc, while investors remained broadly cautious as they waited for Washington to agree on a fiscal plan for the United States. Euro zone business activity returned to growth in July, with Wednesday's final Composite Purchasing Manager's Index (PMI) at 54.9 in July, compared to June's 48.5 and the flash estimate of 54.8.

Italy's service sector returned to growth and services in Spain grew modestly for the second month in a row. But firms still shed jobs and faced an uncertain future. European retail sales rebounded to pre-pandemic levels, with online shopping falling for the first time this year in June as consumers returned to physical stores.

"There has been a trend recently of PMIs and ISMs beating expectations and the market reacting to that," said Antoine Bouvet, senior rates strategist at ING. "I’m not sure this is really justified but this is a pattern that has been repeated for a few months now," he said.

Bouvet added that he expected the spread between rates in the United States and eurozone to widen, as Europe faces a resurgence in COVID-19 cases. U.S. Treasury yields sank overnight as doubts grew about an economic recovery in the United States. Lack of progress in Washington on the latest coronavirus relief package kept sentiment subdued.

The 5-year Treasury yield dropped to a record low on Tuesday, after successive record lows on Wednesday, Thursday and Friday of last week. Italy's 10-year government bond yield, which hit new five-month lows on Wednesday, was up half a basis point at 1100 GMT, at 1.02%.

Spanish and Portuguese government bond yields also rose slightly . Germany's benchmark 10-year yield was up 3 bps at -0.524%, having hit a new low of -0.561 at the end of July.

European assets have become more appealing to investors as a 750 billion-euro ($882.68 billion) European Union recovery fund boosted sentiment towards the bloc and U.S. coronavirus cases surged. The European Central Bank's chief economist, Philip Lane, downplayed a recent rebound in economic data on Tuesday and said that a full economic recovery would take a long time.

He also said that the bank is committed to supporting the euro zone economy, by using bond purchases as its main tool. Investors are focused on negotiations on fiscal stimulus in the United States. Treasury Secretary Steven Mnuchin raised the possibility of a deal by week's end but warned that "we're not going anywhere close" to the $3.4 trillion package that Democrats have been seeking. ($1 = 0.8463 euros)