German 2-yr yields hit one-month low as euro zone services sector stalls

* German 2-year yields hit lowest since August 8

* Euro zone PMI shows services industry growth slowing

* France due to auction long-dated debt

* Euro zone periphery govt bond yields

By Abhinav Ramnarayan

LONDON, Sept 3 (Reuters) – Short-dated German bond yields dropped to their lowest level in nearly a month on Thursday as a survey showed the euro zone’s rebound from its deepest downturn on record faltered in August.

Growth in the bloc’s dominant service industry almost ground to a halt, suggesting the long road to recovery will be bumpy.

With oil prices dropping 2% on Wednesday and weak retail sales from Germany and private payrolls data from the United States undershooting expectations, investors retreated to the safety of government bonds.

“It’s a weird situation where we see equities continue to perform at all-time highs, but we also have the unresolved COVID-19 situation fuelling demand for government bonds,” said DZ Bank rates strategist Christian Lenk.

“Concern over Covid-19 and support from central banks are also keeping yields low,” he added.

Germany’s two-year bond yield dropped three basis points to -0.718%, its lowest level since Aug. 8, while longer-dated 10-year and 30-year Bund yields were at one-week lows.,

Most other euro zone bond yields across the spectrum were lower by 1-2 basis points.

French yields remained flat ahead of a an auction in which the country’s debt agency is expected to raise 11 billion euros in an auction that includes 30-year and 40-year debt sales. Spain will also auction debt to raise about 5.25 billion euros.

With Germany recording strong demand for its inaugural 10-year Green bond on Wednesday, expectations are for the French and Spanish auctions to also go well.

Final readings of IHS Markit’s purchasing managers’ indexes (PMI) for the services sectors of France and Germany also showed a slight easing of the recovery.

France said on Thursday it plans to spend 100 billion euros ($118 billion) to pull its economy out of the slump. The stimulus equates to 4% of gross domestic product, meaning France is ploughing more public cash into its economy than any other big European country as a percentage of GDP. (Reporting by Abhinav Ramnarayan; Editing by Toby Chopra)

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