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By Bloomberg

European government bonds rose after China devalued the yuan by the most in two decades to combat an economic slowdown, boosting demand for fixed-income assets.

Gains in the euro region’s bond markets followed those in U.S. Treasuries as the People’s Bank of China cut its daily reference rate versus the dollar by 1.9 percent. The Chinese central bank said market forces will play a greater role in the currency. Later Tuesday, economists forecast data will show a gauge of German investor confidence increased this month, while Greece concluded a deal on the terms of its third bailout.

Odds the Federal Reserve will raise interest rates next month dropped to about 50 percent from 54 percent at the end of last week as investors weighed how the U.S. central bank will react to China’s devaluation.

The impact on European bonds “is via China worries in general and how this could affect, i.e. flatten, the Fed hike trajectory,” said Benjamin Schroeder, a Frankfurt-based interest-rate strategist at Commerzbank AG. “Problems in China having potential knock-on effects also on commodities and thus inflation expectations.”

Germany’s 10-year bund yield fell three basis points, or 0.03 percentage point, to 0.67 percent as of 8:31 a.m. London time. The 1 percent security due August 2025 rose 0.28, or 2.80 euros per 1,000-euro ($1,103) face amount, to 103.19.

The yield on Italian 10-year bonds dropped four basis points to 1.79 percent. Benchmark Treasury 10-year note yields declined four basis points to 2.19 percent and those on U.K. 10- year government debt fell four basis points to 1.89 percent.

Commodities Slide

Oil dropped amid a broader slide in commodities after China’s devaluation. Crude has slumped more than 25 percent since this year’s peak closing price in June, which has damped the outlook for global inflation. Slower inflation helps preserve the purchasing power of the fixed payments from bonds.

“Core European government bonds being supported by weaker commodity prices and the rally in U.S. Treasuries overnight as a result of the move by the PBOC,” said Nishay Patel, a London- based fixed-income strategist at UBS Group AG. The devaluation “will make imports of raw materials more expensive and this has dragged commodity prices lower.”