Euro zone yields drop as German business morale falls

By Abhinav Ramnarayan

LONDON (Reuters) - Euro zone government bond yields dipped on Thursday after a survey showed German business confidence fell in February, offsetting an earlier rise in yields after the minutes of the last Federal Reserve meeting revived fears of inflation.

German business confidence fell more than expected in February but remained high, a survey showed on Thursday, suggesting that Europe's biggest economy is set for solid growth in the first quarter of this year.

Euro zone government bond yields, which had risen in early trade, fell 1-2 basis points across the board after the release.

"The euro area economy has been picking up for awhile now and it's got to a point where expectations are for solid growth; but perhaps there aren't as many surprises in the data anymore," said Investec economist Victoria Clarke.

Most bond yields in the bloc remained lower after minutes of the European Central Bank's January meeting showed policymakers rejected even a token change in the bank's policy message, arguing that it was premature to signal policy normalisation given weak inflation.

U.S. Treasury yields, which had hit multi-year highs overnight, also dropped to 2.92 percent <US10YT=RR>, 4 bps off Wednesday's peak.

German 10-year bond yields, the benchmark for the region, were down 2 bps at 0.70 percent <DE10YT=RR>, having reversed early rises.

The "transatlantic spread" between German and U.S. 10-year borrowing costs was close to its widest in more than a year at around 222 bps, reflecting the diverging monetary policy expectations between the two countries.

Elsewhere, Greek government bonds were in demand after Moody's moved overnight to upgrade Greece two notches from "Caa2" to "B3" and maintained its positive outlook. The agency said it believed Greece will return to self-sufficiency and market-based funding.

Greece has also been upgraded by S&P Global and Fitch recently, but Moody's was not due to review Greece's rating until later.

"It came as a surprise in terms of the timing -- but the overall rating story and economic story on Greece is on track," said DZ Bank analyst Sebastian Fellechner.

The yield on Greece's 10-year government bond fell 9 basis points to 4.34 percent before steading at around 4.38 percent in late trade <GR10YT=RR>. Shorter-dated Greek 5-year government bond yields briefly dropped as much as 30 basis points to 3.348 percent.

(Reporting by Abhinav Ramnarayan; additional reporting by Dhara Ranasinghe; Editing by Catherine Evans)