German yields rise on upbeat PMI data but clouds loom

The recovery in euro zone manufacturing activity gathered pace last month but it was largely driven by powerhouse Germany and rising coronavirus cases across the region may yet reverse the upturn, a survey showed. "The PMI data was slightly optimistic but more worrying is the rise in COVID-19 cases which should cap any big rise in bond yields," said Christian Lenk, a strategist at DZ Bank.

German government bond yields edged higher on Thursday, after posting their biggest monthly drop in five months in September as equities held onto gains, while European manufacturing survey data came broadly in line with expectations. The recovery in euro zone manufacturing activity gathered pace last month but it was largely driven by powerhouse Germany and rising coronavirus cases across the region may yet reverse the upturn, a survey showed.

"The PMI data was slightly optimistic but more worrying is the rise in COVID-19 cases which should cap any big rise in bond yields," said Christian Lenk, a strategist at DZ Bank. German 10-year government bond yields edged more than a basis point higher at -0.511% after falling to a near two-month low of -0.55% on Wednesday.

Demand for riskier assets was also seen in demand for peripheral debt from countries like Portugal and Italy, where yields were softer across the board. That tightened the gap between Italian and German 10-year bonds to 137 bps, just shy of a February low of 135 bps touched on Tuesday.

But market watchers said the rise in yields was likely to be temporary and reflected a lack of market activity in Asia, where China is closed for all of next week and South Korea shut for the rest of this week. Renewed concerns about the economic impact of rising coronavirus cases in Europe, weak inflation, and U.S. election uncertainty are likely to keep demand for fixed income assets intact.

A resurgence in European COVID-19 cases has meant some restrictions have now been reimposed and a recent Reuters poll of economists said growth and inflation surprises are more likely to be negative than positive in the coming year. The overnight newsflow was mixed as U.S President Trump signed a stopgap funding bill to keep the government running while officials have yet to agree on providing further COVID-19 stimulus.

British government bond yields bucked the general firming trend as Brexit concerns dominated. Elsewhere, a key euro zone money market rate dropped to a record low after a higher-than-expected take-up of cheap loans from the European Central Bank sharply boosted liquidity in the banking sector.