* German 10-year yields drop back to 0.40 pct mark
* Euro zone PMIs spark tariff concerns
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices for close, adds move in USTs)
By Abhinav Ramnarayan
LONDON, July 24 (Reuters) - Disappointing euro zone business survey data pulled German bond yields off five-week highs hit earlier on Tuesday and pushed up Italian borrowing costs, as investors fretted over the future impact of trade tariffs on European businesses.
Euro zone business growth slowed more than expected this month as fears over a trade war with the United States and a weaker global expansion further dented optimism, a survey showed on Tuesday.
Investors, who had been encouraged by Chinese fiscal stimulus and strong corporate earnings to shed government debt in early trade, quickly retreated to the safety of the bond market.
“At the initial release, the data looked relatively benign, but as everyone started looking into the data and the forward looking components, it was clear it was signalling more weakness ahead,” said Mizuho strategist Peter Chatwell.
“At the very least you have to say sentiment is being hit by expectations tariffs will be applied to European exporters.”
In late afternoon trade, Germany’s 10-year Bund yield was down 1 basis point at 0.39 percent, off a five-week high of 0.424 percent hit earlier in the day.
On the other hand, Italian 10-year bonds yields were up 3 bps at 2.66 percent and the closely-watched spread over Germany was at 230 bps, its widest in just over a week.
“The euro zone PMIs suggest that there could be some softness in the numbers when we get the peripheral data later this month,” said Chatwell, as German and French PMIs were steady on Tuesday.
Earlier in the session, positive headlines added to talk about a possible monetary policy tweak in Japan — pushing up German bond yields, while French 10-year bond yields hit their highest in over a month.
“Global stocks, Asian stocks in particular have seen a boost from (potential) policy-easing measures in China and this helps the general risk sentiment and adds to some of the headwinds to bond markets,” said Commerzbank strategist Rainer Guntermann.
“Also, there is a repricing in U.S. Treasuries, so you may add the argument that corporate earnings and a strong U.S. economy are also contributing,” he said.
China will adopt a more vigorous fiscal policy to help tackle external uncertainties without resorting to strong policy stimulus, state radio said on Monday, citing the cabinet.
Yields have also been pushed higher by reports over the weekend that the Japanese central bank was debating moves to scale back its massive monetary stimulus.
U.S. 10-year Treasury yields held at five-week highs on Tuesday as concerns that global central banks will be less accommodative weighed on bonds. (Reporting by Abhinav Ramnarayan Editing by Keith Weir and Jon Boyle)