Spanish, Italian yields bounce off five-month lows on weak PMIs


* Periphery yields edge up on weak euro zone PMIs

* Bund futures hit two-month highs after U.S. PMIs

* Some in the market speculate about further ECB easing

By Marius Zaharia and Emelia Sithole-Matarise

LONDON, Oct 24 (Reuters) - Spanish and Italian bond yieldsbounced off five-month lows on Thursday after surveys showedgrowth in euro zone business activity unexpectedly eased,suggesting the economic recovery may be losing momentum.

German Bunds futures weathered the euro zone data but werebriefly pushed to their highest in over two months by weakerthan expected U.S. manufacturing growth figures, which supportedexpectations the Federal Reserve would delay trimming itsbond-buying stimulus at least until early next year.

The pace of growth in the euro zone's dominant servicesector eased sharply, with the purchasing managers' index (PMI)falling to 50.9 in October from 52.2 in September. It had beenexpected to nudge up to 52.4 and was below all forecasts in aReuters poll of 33 economists.

An index measuring new business slumped to 50.2 fromSeptember's 27-month high of 51.7.

Anything above the 50 mark indicates growth.

These numbers contrasted with flash Markit/HSBC PMI numbersfor China, the world's second-biggest economy, which rose to aseven-month high in September.

Italian 10-year yields were last up 3 basispoints at 4.15 percent, having hit their lowest since early Juneat 4.085 percent on Wednesday, according to Reuters data. Theyrose as high as 4.18 immediately after the euro zone PMIs.

Equivalent Spanish yields were 1 bp higher at4.15 percent, having hit their lowest since May at 4.107 percentminutes after the market opened.

Traders said some investors used the PMI data as anopportunity to book profits on the recent rally in lower-rateddebt but returned to those markets later in the session giventhat most other recent euro zone data have been positive.

"Today's PMIs do raise a question mark over the recovery,but only a small one. It's too early to get too concerned,"Investec chief economist Philip Shaw said.


Speculation of further monetary easing by the EuropeanCentral Bank, which was fostered by the weak PMIs, alsosupported peripheral debt.

At 1.1 percent in September, inflation has fallen way belowthe ECB's close-to-2-percent target and with the euro hitting its highest in two years versus the dollar on Thursday, threatening to choke export growth, that could give the ECBextra reasons to ease policy.

But some analysts still have doubts the ECB is going to cutrates further or inject more liquidity, and say the strongereuro may have a negative impact on those bonds.

"The ECB has said repeatedly that they never use thecurrency as a medium-term objective," said Gianluca Ziglio,executive fixed income director at Sunrise Brokers. "The strongeuro could be problematic for countries like Italy."

Returning to sustainable growth is key for reducing overallindebtedness in peripheral countries.

Bund futures briefly hit their highest sincemid-August at 141.22 after surveys showed U.S. manufacturinggrew at its slowest pace in a year this month and factory outputcontracted for the first time since late 2009.

They closed only 1 tick higher at 140.87, however.

"The numbers were weak, but not a game changer or picturechanger by any means. Delayed (Fed bond-buying) tapering is somuch in the market now," said David Keeble, global head of fixedincome strategy at Credit Agricole.

"These are good selling levels."

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