UPDATE 3-Euro zone yields rise on growth signals, Brexit deal hopes and Fed

Euro zone government bond yields rose after surveys showed business activity was surprisingly firm in February, on hopes of a new Brexit deal and as the market continued to digest the latest FOMC minutes.

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.

Analysts say the move in Bund yields was also affected by the minutes of the FOMC. The U.S. Federal Reserve on Wednesday signalled it would soon lay out a plan to slow the runoff of its balance sheet. Fed officials were divided as to the path of interest rates in 2019 with some more confident that a further rate hike still will be required later this year, while others were more cautious.

"It happened overnight but is still trading through a bit today," said Rabobank rates strategist Lyn Graham Taylor. "The Fed was a bit net less dovish than people expected in terms of the minutes. The rates outlook was slightly more hawkish with several arguing that rates increases would prove necessary." Earlier, sources suggested to Reuters that the United States and China had sketched the outlines of a deal to end their trade dispute, which would also translate to greater risk taking in the markets.

Yields were also boosted 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, briefly touched a two-week high of 0.146 percent, and was still on track for its biggest one-day rise in over a month.

Gilt yields tracked the move higher in Bunds yields to hit a two-week high of 1.227 percent, before easing off to 1.215 percent, while 10-year U.S. Treasury yields were up over four basis points to 2.695 percent. 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 Toby Chopra)

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