Euro zone bond yields fall from 6-week high amid flight to safe assets

By Joice Alves

LONDON, Nov 21 (Reuters) - Euro zone bond yields retreated from six-week highs on Friday as sentiment reversed and investors sold off risk assets like stocks and bought back bonds.

Following a rally on the back of this week's upbeat results from AI bellwether Nvidia, stocks in Europe recorded steep losses on Friday as concerns over stretched tech valuations contributed to a risk-averse mood.

Bonds also got a boost after New York Federal Reserve's John Williams said that the U.S. central bank can still cut interest rates "in the near term" without putting its inflation goal at risk.

Among euro-denominated assets, investors often turn to German bonds when global risk sentiment sours, given the country's very low default risk and high bond market liquidity.

Bond yields move inversely with prices.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was down 2.7 basis points (bps) at 2.69%, having hit its highest in six weeks on Thursday at 2.741%.

Italy's 10-year government bond yield IT10YT=RR fell 1 bp to 3.46%, after also hitting its highest in six weeks on Thursday.

NVIDIA MOOD BOOST TEMPORARY

"The results from Nvidia did nothing to change the facts about AI valuations. The mood boost it delivered proved temporary," Neil Wilson, UK Investor Strategist at Saxo Markets, said.

On the data front, euro zone business activity grew steadily this month as services expanded at the quickest pace in 1-1/2 years, while weak demand sent manufacturing back into contraction territory, a private survey showed.

The 20-nation bloc has shown economic resilience despite high global uncertainty since the start of the year, confirming expectations the European Central Bank will most likely hold interest rates next year.

By contrast, following Williams' comments, investors shifted pricing on contracts tied to the Fed's benchmark interest rate to reflect a nearly 60% chance of a quarter point cut at the December 9-10 meeting, reversing what had been a strong conviction that the Fed would pause at its next meeting over concerns about inflation.

Concerns about financial market stability, including the potential for a sharp drop in asset prices, are emerging as a fresh theme for Fed officials as they debate when to cut interest rates further.

Shorter-end yields, which are more sensitive to changes in interest rate policy, were also falling on Friday.

Germany's two-year yield DE2YT=RJR was down 2.1 bps at 2.00%, having briefly touched a two-week low.