Thu Oct 23, 2014 6:48am EDT
* Euro zone PMIs beat expectations
* German bund yields reverse early falls
* Upcoming bank stress tests keep investors cautious (Updates prices, adds quote)
By John Geddie
LONDON, Oct 23 (Reuters) - German government bond yields edged higher on Thursday after an unexpected uptick in euro zone business surveys staved off fears the bloc could be headed for a triple-dip recession.
Markit, which publishes the survey, said the positive reading for the euro zone manufacturing sector points to an expansion in gross domestic product in the current quarter.
"There's been a string of bad news so this is one thing at least to give a little bit of a fillip to the market and show that it's not all bad news, not all one way," said Orlando Green, European fixed income strategist at Credit Agricole CIB.
German 10-year yields rose 1 basis point to 0.87 percent at 1030 GMT, having been as low as 0.84 percent in early trading.
The purchasing manager data showed a strong rebound in German manufacturing, but French business activity slid in October to an eight-month low.
This economic divergence is at the heart of a rift in Brussels where France and Italy are pushing for more fiscal leeway while Germany is keen to keep members' finances in check.
The European Commission is discussing changes with Italy and France to their 2015 draft budgets to avoid having to send back the plans, which break European Union rules, EU officials said on Wednesday.
Investors were also comforted by the fact that China's vast factory sector grew a shade faster in October, though analysts said the figure did not point to a fourth-quarter turnaround for the world's second-largest economy.
U.S. manufacturing PMIs are due at 1345 GMT. Data showing a mild rebound in U.S. consumer prices on Wednesday reduced bets the Federal Reserve will push back eventual interest rate hikes.
European bond markets have been buoyed by a report that the European Central Bank is considering buying corporate bonds as its next stimulus measure -- a move many see as a prelude to sovereign bond purchases.
Analysts at Unicredit said the latest euro zone data could give the ECB pause as it decides what next steps to take to support the economy.
"Thanks to these better-than-expected preliminary PMI readings, we believe that the ECB will continue with its wait-and-see mode to assess the impact on the real economy of its recent measures," the analysts said in a note.
Traders say volumes remain low as investors wait on the sidelines for the results of the ECB's bank stress tests, due on Sunday.
Shares in Italian banks Monte dei Paschi and Banca Carige were hit on Thursday after Bloomberg reported that both banks were likely to need additional capital.
Pimco's global banking specialist, Philippe Bodereau, told Reuters that he expects 18 banks will be seen to have failed the stress tests.
Italian and Spanish yields were steady at 2.52 and 2.21 percent respectively.
Greek bond yields, which have whipsawed on concerns about political stability and the government's plan for an early exit from Greece's bailout, rose 7 bps to 7.48 percent. (Additional reporting by Michael Urquhart; Editing by Catherine Evans)
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