German Bund yields at highest since mid-April as risk appetite soars

By Dhara Ranasinghe and Abhinav Ramnarayan

LONDON (Reuters) - Germany's benchmark 10-year Bund yield hit its highest level since mid-April on Wednesday as investors shed safe haven assets on encouraging economic data from China and optimism about the easing of lockdown restrictions around the world.

Italy's borrowing costs also rose, hitting a one-week high, as the country received over 100 billion euros of demand for a new 10-year government bond sale, suggesting the deal size could be quite high.

Demand for European government debt in general took a knock as world stocks vaulted to three-month highs after the Chinese services sector bounced back to growth and as lockdown restrictions were eased globally.

"It looks like the improvement in risk sentiment globally is weighing on safer assets," said ING senior rates strategist Antoine Bouvet.

Selling in bond markets was expected to be limited ahead of Thursday's ECB meeting, at which many economists expect the central bank to ramp up emergency bond purchases to bolster an economy ravaged by the coronavirus pandemic.

ECB data released on Tuesday showed the central bank scooped up all of Italy's new debt in April and May but only managed to keep borrowing costs from rising.

The ECB and the Bank of Italy bought 37.4 billion euros worth of Italian bonds under its emergency bond buying scheme, or 21.6% of the program's monthly total, the first breakdown of the figures showed. Italy's share of the scheme, based on the size of its economy and population, should be 17%.

"There is a clear willingness to tighten spreads by deviating from the capital key, which will help skew market reaction in favors of Italy and Spain if we are right in expecting a top-up of the PEPP (Pandemic Emergency Purchase Programme) tomorrow," Bouvet said.

Germany's benchmark 10-year German bond yields rose to -0.373% in early trade, their highest since mid-April, though they eased back to around -0.40% by 1200 GMT. Ten-year bond yields across the euro area were 2-4 bps higher on the day, while 30-year US Treasury yields hit their highest level since late March.

Italy's 10-year bond yield rose 4.5 bps to 1.55% as the Treasury started marketing a new 10-year BTP bond via a pool of banks. At the last update, the country's debt management office was set to price the bonds at 9 bps over the outstanding August 2030 BTP.

Bond yields tend to rise during a debt sale as investors sell outstanding bonds to make space for the new supply.

(Reporting by Dhara Ranasinghe and Abhinav Ramnarayan, editing by Larry King, Kirsten Donovan)