UPDATE 2-Euro zone yields rise on growth signals and Brexit deal hopes

Euro zone government bond yields rose after surveys showed business activity was surprisingly firm in February, particularly in France, and on news that British lawmakers could vote on a new Brexit deal as soon as next week.

French business activity rose more than expected as manufacturing growth helped offset slack in services that has dogged firms in the wake of anti-government protests, the French purchasing managers' index (PMI) showed. Corresponding surveys for Germany and the euro zone as a whole showed more of a mixed picture, overshooting expectations but at the same time cementing concerns around the manufacturing sector.

"Evidence of a decent February for the euro zone is mounting... In an economy close to stagnation, this is a welcome sign and suggests continued, albeit slow, growth in the first quarter," said Bert Colijn, an economist at ING. However, Germany's manufacturing sector continued to be a cause for concern, he added.

Yields were pushed even higher after UK finance minister Philip Hammond said British lawmakers could be given a vote on a revised Brexit deal as soon as next week, raising hopes a disorderly exit from the European Union can be avoided. "The assumption in the market is that the new agreement will be solid enough legally to alleviate concerns that some members of parliament had, and the deal would get approved," said Mizuho strategist Antoine Bouvet.

Euro zone government bond yields, which have compressed partly because of concerns around what effect a no-deal Brexit would have on the European economy, rose 2-4 basis points across the board. Germany's 10-year government bond, the benchmark for the region, was up 3 bps to a one-week high of 0.135 percent.

Economic growth in Europe has slowed considerably in recent months, with Italy falling into recession and Germany narrowly escaping a recession at the end of last year. With concern mounting over potential U.S. tariffs on cars, it could be hit even harder. Germany recorded the world's largest current account surplus for the third year running in 2018. The country's strong exports vex U.S. President Donald Trump, highlighting the risk of U.S. tariffs on German cars.

Also capping the broad rise in yields, the U.S. Federal Reserve on Wednesday signalled it would soon lay out a plan to slow the runoff of its balance sheet. Earlier, sources suggested to Reuters that the United States and China had sketched the outlines of a deal to end their trade dispute.

European Central Bank chief economist Peter Praet is due to speak later on Thursday. Comments he made last week on potential cheap loans to euro zone banks boosted demand for southern European bonds, Italian debt in particular. Italian yields edged lower on Thursday, bucking the wider trend, with 10-year yields dropping 2 bps to 2.84 percent. (Reporting by Abhinav Ramnarayan, editing by John Stonestreet and Susan Fenton)