German 30-year bond yields hit two-month high; investors fret over long-term US debt

German long-term bond yields hit a two-month high on Thursday as investors' concerns over a worsening fiscal outlook in the United States were reinforced by tepid demand for a U.S. Treasury auction a day earlier.

Worries regarding the U.S. debt load, fanned by President Donald Trump's tax bill, which earlier advanced towards a vote on passage in the House of Representatives, have lifted U.S. borrowing costs this week.

"It's clear that this is not a budget ... that is very attractive to foreign investors," Samy Chaar, chief economist at Lombard Odier, said.

He said the bill is viewed as having fewer macro payoffs than the previous one, leading investors to demand a premium to finance it.

"And the premium can only be a lower dollar or higher yields," he said, though he added that he did not expect a funding crisis for the United States.

Euro zone bond yields edged up modestly across the board, but longer-term bonds were clear underperformers, with German 30-year yields (DE30YT=RR) up more than 2 basis points at 3.172%, after hitting their highest since mid-March at 3.179% earlier in the day.

In March, German yields surged after a historic change to the country's borrowing rules and the announcement of a massive spending programme.

German 10-year yields (DE10YT=RR), the euro zone benchmark, were up 0.5 bps at 2.648%, while the more rate-sensitive two-year yield was 4 bps lower at 1.83% (DE2YT=RR).

Additional pressure also came from soft demand for a $16 billion sale of 20-year U.S. Treasury bonds on Wednesday, which followed Moody's removal of the country's top-notch credit rating last week.

"The pressure we're seeing is a global phenomenon, but it is a global phenomenon that is, in my view, rooted in the U.S.," Chaar said.

Yields on 30-year Treasury bonds (US30YT=RR) were stable above 5%, after hitting a 1-1/2 year high overnight.

Earlier in the day, May data for the euro zone showed business activity unexpectedly contracting this month, with the bloc's dominant services industry suffering a deeper downturn in demand. Meanwhile in Britain, manufacturers cut jobs at one of the fastest rates since the global financial crisis almost 20 years ago, according to a survey.

"I think a recession is avoidable, but a slowdown is unavoidable. And we're going to see that in the data," Chaar said.

U.S. manufacturing and services sector survey data for May is due later in the day.

Italy's 10-year yield, seen as the benchmark for the euro zone periphery, was 2 bps higher at 3.67%, while the 30-year yield was up 4 bps at 4.54%. IT10Y