Bund yields rise as slower yuan drop curbs safe-haven allure

By Marius Zaharia

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

Peripheral yields rose as well, but by less 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.

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 expected.

German 10-year Bund yields rose 4 basis points to 0.64 percent. Spanish, Italian and Portuguese yields were up 2 basis points.

German two-year yields came off 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 are pushing for an even deeper yuan devaluation to help China's struggling exporters.

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

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

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 were already at pre-stimulus levels, trading around 0.13 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 6-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 Louise Ireland)