May 21 (Reuters) - Euro zone bond yields dipped on Friday ahead of key business sentiment surveys and a meeting of the bloc’s finance ministers, while analysts watched whether a rally which began on Thursday marked stability for the asset class.
Bonds have come under pressure from recent data pointing to improving economic prospects and potentially higher inflation and flash May purchasing manager indexes (PMIs) for the euro area will offer the latest clues on that front.
The PMIs are expected to show a slight slowdown in manufacturing growth in the euro zone and an acceleration in services growth, with the composite figure covering both also expected to show accelerated growth, according to a Reuters poll.
“All eyes will be on whether capacity constraints risk derailing the recovery, and on inflation,” ING analysts told clients. “Given that EUR rates are still in the initial phase of their recovery-induced rise... we see a strong skew in favour of higher rates still.”
Germany’s 10-year yield, the benchmark for the region, was down 1 basis point to -0.12% at 0650 GMT.
Italy’s 10-year yield was unchanged at 1.06%, after a sharp drop on Thursday.
Focus is also on euro zone finance ministers, who will discuss on Friday how to make sure the pandemic does not leave lasting economic scars that could divide the monetary union. European Central Bank President Christine Lagarde is also expected to speak.
The meeting comes as analysts are watching to see whether a rally in peripheral debt on Thursday is the sign of a stabilization in Southern European government bonds, which have underperformed during a broader market sell-off since April.
That rally drove Italy’s closely watched risk premium on top of German bonds to its lowest in a week at 115 bps, from nearly 125 bps earlier this week.
The bloc’s bond yields have risen in April and May as the bloc’s vaccinations have accelerated, while there is uncertainty around when the European Central Bank will slow its pandemic emergency bond purchases.
“Re-assuring messages from the EU and the ECB for ‘vulnerable’ countries should keep investors from positioning today for a potential adverse scenario in two years time,” said Christoph Rieger, head of rates and credit research at Commerzbank in Frankfurt.
Later on Friday, Moody’s will review Greece’s credit rating, the lowest among the main rating agencies at three notches below investment-grade territory at Ba3.
The review comes after S&P upgraded Greece to BB with a positive outlook, bolstering hopes of a return to investment-grade ratings.
(Reporting by Yoruk Bahceli; Editing by Toby Chopra)