Euro zone yields steady after PMI data; Italian spreads continue to tighten

Euro zone bond yields held steady on Tuesday with the gap between Italian yields and those of Germany and France at around its narrowest in years, and business activity was the only data report in a light day for scheduled events.

Germany's 10-year yield, the benchmark for the euro zone, was last at 2.64%, steady on the day. It hit a two-week low in early trade, but rose off that level after data showed business activity in the euro zone grew at a slightly faster pace in July than in June. Analysts at ING said euro zone economic data seemed to be on a recovering trend, which, in isolation, would send yields higher.

However, "although the correlation with U.S. rates decreased significantly since Trump's election, US developments remain a key source of risk to our outlook," they said. They said it was difficult to see euro rates drifting higher if there were to be a significant rally in U.S. Treasuries.

U.S. ISM manufacturing activity data is due later in the day and is more likely to have a market impact than the euro zone data. After soft U.S. jobs numbers from Friday, investors are looking for more information about the health of the U.S. economy as they try to assess whether and how much the Federal Reserve will cut interest rates this year.

Traders raised bets on the scale of Fed easing after the soft payrolls data, helping Treasuries to rally, as well as European bonds. Italy's 10-year yield was also steady at 3.47%, and, after its 7-basis-point drop on Monday, the difference between it and the German yield was at 83 bps - around the tightest since 2010.

Italy's relatively strong economic performance and general optimism across markets and asset classes have been driving that spread tighter in recent years. Italy's spread to France, where political uncertainty and fiscal worries remain a concern for investors, is about 17 bps, its closest since 2007.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)