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Bund yields firm as slower decline in yuan dims safe-haven allure

(Updates prices, adds comment)

By Marius Zaharia

LONDON, Aug 13 (Reuters) - German Bund yields edged up on Thursday following efforts by China's central bank to slow a sharp descent of the yuan that has prompted investors this week to seek safe-haven assets.

Peripheral yields were little changed as they were supported by the agreement for a third bailout for Greece. The Greek parliament is expected to approve the reforms attached to the conditional programme on Thursday.

Greece's economy posted an unexpected return to growth in the second quarter, but Greek yields held steady.

Losses for the Chinese currency were slight after the People's Bank of China (HKSE: 3988-OL.HK - news) set a midpoint that was again lower than the previous day's, but not as weak as some had expected.

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German 10-year Bund yields rose 2 basis points to 0.62 percent. Spanish and Italian yields were flat at 1.96 percent and 1.79 percent.

German two-year yields were slightly off but near record lows of around minus 0.28 percent hit on Wednesday.

"There are some signs of stabilisation in China's currency, stock markets, commodity prices - all these factors which offered strong support to core markets in the past couple of days - so we're seeing a correction in Bunds as well," BNP (Paris: FR0000131104 - news) Paribas rate strategist Patrick Jacq said.

But he did not expect a strong rebound in yields.

Sources told Reuters some powerful voices in the government were pushing for an even deeper yuan devaluation to help China's struggling exporters.

The currency moves have increased concerns about the state of the world's second largest economy and raised concerns that China is exporting disinflation to other regions.

"We expect risk aversion to continue and ... Bunds should therefore remain well supported despite the early morning reaction," said Alexander Plenk, head of investment research at Bayerische Landesbank.

The European Central Bank's (ECB) favourite measure of the market's long-term inflation expectations - the five-year, five-year breakeven forward - traded just above 1.65 percent, having hit its lowest since the end of March on Wednesday at around 1.63.

The measure shows where markets expect 2025 inflation forecasts to be in 2020. A fall below 1.6240 percent would take it to levels seen before the ECB launched its trillion euro bond-buying stimulus programme to bring inflation back to its target of nearly 2 percent.

One-year inflation swaps have already hit pre-stimulus levels, trading at around 0.15 percent, compared with almost 1 percent in June.

The drop in inflation expectations has prompted bets that the ECB will expand its quantitative easing (QE) programme beyond September 2016, when it is due.

"Global disinflationary forces call for a larger and longer QE response from the ECB," Societe Generale (Swiss: 519928.SW - news) rate strategists said in a note.

"Remember that a six-month review of ... (QE) is due next month. We could see some surprises."

Similarly in the United States, the weaker yuan trimmed expectations for a rate hike in September. (Editing by Gareth Jones)