Euro zone bond yields edge up on Ukraine hopes, flash PMI

Fears that Russia could invade the Ukraine have taken the sting out of a rout in bond markets this month, as investors put aside concerns about rising interest rates to snap up safe-haven debt. For instance, Germany's 10-year Bund yield fell almost 9 basis points (bps) last week in their biggest weekly drop since November.

Euro zone government bond yields crept up on Monday after the United States and Russia agreed in principle to a summit over Ukraine, while a key gauge of business activity supported the case for a hawkish shift at the European Central Bank. Fears that Russia could invade the Ukraine have taken the sting out of a rout in bond markets this month, as investors put aside concerns about rising interest rates to snap up safe-haven debt.

For instance, Germany's 10-year Bund yield fell almost 9 basis points (bps) last week in their biggest weekly drop since November. But on Monday, yields across the euro area headed back higher as a brighter mood took hold across financial markets, denting demand for safe havens.

German Bund yields rose 1 bps to 0.21%, above a one-week low touched briefly at around 0.19%. Most other 10-year yields were around 1-2 bps higher on the day . Russia denies any intention to invade Ukraine but has massed troops near the border. News of a potential summit between the U.S. and Russian presidents raised hopes of a possible path out of one of the most dangerous European crises in decades.

"While the chances for a high-level summit provide near-term relief, headline risk continues to loom large," said Commerzbank rates strategist Rainer Guntermann. The latest euro area flash purchasing managers index (PMI), a forward-looking gauge of economic activity, added to the downbeat tone in bond markets, where prices fell as yields rose.

Italy's 10-year bond yield was last up 3 bps on the day at 1.88%. IHS Markit's Flash Composite PMI jumped to a five-month high of 55.8 in February from 52.3 in January, significantly above the median 52.7 forecast in a Reuters poll.

Improving demand for services pushed business activity across Germany's private sector to a six-month high in February, the German flash PMI showed. Bert Colijn, senior euro zone economist at ING, said the euro area PMI suggested a recent dip in economic activity could be much milder than expected, while labour market pressures continued to build and second-round effects meant more broad-based price pressures.

"Expect this to add to hawkish pressures ahead of the European Central Bank March meeting," he said in a note. Money markets price in 40 basis points worth of rate hikes in total from the ECB by year-end, down from roughly 50 bps a week ago.

Overall trading in bond markets was subdued with U.S. markets closed for a holiday.