Euro zone bond yields unfazed by PMIs, weigh ECB's stance

Flash Purchasing Managers' Index (PMI) data from IHS Markit, showed euro zone business activity expanded at its fastest monthly pace in over two decades in July, despite slowing in France, and exceeded expectations. Input prices, which are being watched closely given the focus on inflation, held steady from June's highs, while a composite future output reading slumped to its lowest since February, reflecting a dent in confidence given the spread of the COVID-19 Delta variant.

Eurozone bond yields sought direction on Friday and were little moved by a strong business activity reading for the bloc, while investors continued to digest Thursday's ECB policy decision. Flash Purchasing Managers' Index (PMI) data from IHS Markit, showed euro zone business activity expanded at its fastest monthly pace in over two decades in July, despite slowing in France, and exceeded expectations.

Input prices, which are being watched closely given the focus on inflation, held steady from June's highs, while a composite future output reading slumped to its lowest since February, reflecting a dent in confidence given the spread of the COVID-19 Delta variant. Most eurozone 10-year bond yields were up around 2 basis points by 1006 GMT, rising only slightly following the data and less than U.S. Treasury yields, with Germany's 10-year yield, the benchmark for the region, at -0.40%, still near the lowest since February, -0.44%, touched earlier this week.

Italy was the exception, with 10-year bond yields down 1 bp to 0.64%. The closely watched gap with German peers was at 105 bps, below yesterday's peak at 108 bps. Given that the recent fall in yields reflects focus on the spread of the Delta variant, UniCredit analysts had not expected the data to move the market.

"Developments in the broader pandemic picture are likely to remain at the forefront of investors' concerns," they said. The focus remained on the European Central Bank, which on Thursday pledged to keep interest rates at record lows for even longer to boost the bloc's sluggish price growth, at its first meeting since it adopted asymmetrical, 2% inflation target as a result of its strategic review earlier in July.

Mizuho analysts said that the ECB's new approach carries a much lower risk of the ECB making an error and tightening policy at the wrong time, expecting that to lead to lower rates volatility. On Friday, ECB policymaker and French central bank chief Francois Villeroy de Galhau said he sees eurozone inflation hitting the 2% target at the mid-point of the ECB's forecast horizon in 12-18 months' time.

ECB President Christine Lagarde said on Thursday that the bank would not hike interest rates until it sees inflation reach the target at the mid-point of its projection horizon. A significant group of European Central Bank policymakers objected to the new interest rate guidance but most were won over and only two - the German and Belgian central bank chiefs - held out, sources told Reuters after the ECB meeting.

Belgium's Pierre Wunsch said on Friday that he was uncomfortable with the ECB's new guidance, pointing to market-based expectations of rates remaining low for years.