Aug 18 (Reuters) - Euro zone government bond yields dropped on Friday as concerns about the global economy nudged investors into safe-haven debt.
A major Chinese asset manager has told its investors it needs to restructure its debt, stoking fears that a chain of defaults could spread through the financial sector and deliver a destabilising shock to China's already sluggish economy.
Euro area borrowing costs were ready for a correction after the euro area's benchmark Bund yield approached its highest levels in 12 years on Thursday.
Bond prices move inversely with yields.
Germany's 10-year government bond yield dropped 8.5 bps on Friday to 2.61%. It hit 2.714% the day before, just off its highest level in 12 years, reached in early March at 2.77%.
"The overnight bid across the U.S. Treasury curve amid in-line Japanese inflation figures and risk-off in China is encouraging and looks set to keep yields off the highs for now," said Michael Leister, head of rates strategy at Commerzbank.
U.S. borrowing costs pulled back after benchmark U.S. Treasury 10-year yields hit their highest levels since October, and 30-year yields hit 12-year highs on Thursday. Robust economic data had raised investor expectations that the Federal Reserve will hold interest rates higher for longer.
Japan's core consumer prices slowed in July, supporting expectations the Bank of Japan (BOJ) will be in no rush to phase out monetary easing.
Data showed further signs of weakness for the euro area economy, with building permits for apartments in Germany falling 27% during the first half of the year.
Meanwhile, in non-EU Britain retailers reported a bigger-than-expected drop in sales in July as shoppers felt the hit from inflation.
Germany's 2-year yields dropped 5.5 bps to 3.08%.
The German yield curve further narrowed its inversion, with the gap between 2-year and 10-year yields hitting -35.4 bps, its highest level since mid-May.
Analysts said moves in U.S. Treasuries and central banks suggesting they will hold interest rates at high levels for an extended period had driven yields on longer-dated bonds higher, steepening yield curves on both sides of the Atlantic.
"Part of the reason behind the relentless rise in U.S. Treasury yields might be down to Chinese selling to raise funds to prop up the ailing yuan, the consequence of relentless FX outflows," said Jeremy Batstone-Carr, European strategist at Raymond James.
China's yuan firmed against the dollar on Friday, picking up from a more than nine-month low earlier in the week after the central bank set the daily fixing much higher than expected.
Italy's 10-year yield, the benchmark for the euro area periphery, fell 9 bps to 4.32%, with the spread between Italian and German yields at 170 bps. (Reporting by Stefano Rebaudo, editing by Susan Fenton)
