Germany's 10-year yield holds gains after data boosts optimism

* Euro zone periphery govt bond yields

LONDON, July 2 (Reuters) – Germany’s benchmark 10-year bund yield was broadly flat on Thursday, still holding near -0.4% after better-than-expected euro zone economic data, while southern European bond yields fell, as investors’ risk appetite increased.

The 10-year Bund yield broke above -0.4% for the first time in a week on Wednesday, in its biggest daily jump in a month, after improved euro zone manufacturing data boosted investors’ mood as European countries emerge from lockdown.

At 0736 GMT, Germany’s 10-year yield was at -0.4%, broadly flat on the day.

Rainer Guntermann, a rates strategist at Commerzbank, wrote in a note to clients that although the data might have been the catalyst for Wednesday’s sell-off in safe-haven government debt, month-end flows and hedging of corporate bond issuance were also possible factors.

Higher-risk southern European bond yields edged down 1-3 bps, with Italy’s 10-year yield at 1.309%, down 3 bps on the day, near the lows reached at the end of March before the rally of May and June.

Portuguese, Spanish and Greek 10-year yields also slipped, but to a lesser extent .

France is expected to issue long-dated bonds worth up to 11.75 billion euros ($13.24 billion) at 0850 GMT.

“Concessions into today’s French long-end auction … may explain yesterday’s 30y underperformance vs. Bunds,” Commerzbank’s Guntermann wrote.

The Dutch prime minister said a compromise on the highly-anticipated EU-wide recovery fund is possible, but negotiations will be tough.

He said it was more logical for the fund to be made up of loans rather than direct grants, a major sticking point with others, including French President Emmanuel Macron who say the fund should include 500 billion euros of grants to countries hardest hit by the coronavirus crisis.

The European Central Bank’s chief economist, Philip Lane, signalled a pause in policy action in an interview on Wednesday. He said that the ECB does not target any particular spread levels between the yield of euro zone members, and it is “absolutely not” into yield targeting.

This “keeps ECB expectations in check – similar to last October when ECB easing fatigue loomed large following a comparable communication shift,” Commerzbank’s Guntermann said.

U.S. Federal Reserve policymakers also appear skeptical of yield curve control, alternately described as a “target” or “cap” in the Fed’s minutes released on Wednesday.

A key measure of long-term inflation expectations in the euro zone rose to four-month highs on Wednesday, boosted by the pick-up in European data and massive ECB stimulus.

Euro area unemployment data for May is due at 0900 GMT. ($1 = 0.8874 euros) (Reporting by Elizabeth Howcroft. Editing by Jane Merriman)

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