Euro zone yields edge higher on debt supply, economic green shoots

Spanish and Portuguese 10-year yields were also up about two bps each, with Southern European debt increasingly trading in line with better-rated peers following the creation of an EU recovery fund earlier this year. The upward move in yields could be checked closer to a European Central Bank meeting on Thursday, if the signs are that policymakers are unimpressed by the indications of an economic recovery and flag further stimulus.

Euro zone bond yields rose across the board on Monday on signs of an improved global economy and ahead of a week of healthy supply, as countries get to grips with increased borrowing requirements to help fund the response to the COVID-19 crisis.

China's exports rose the most in nearly 1-1/2 years in August, data showed, a sign that more of its trading partners -- such as the euro zone -- are reopening their economies and are on the mend. This follows last week's key German industrial production rise of 1.2%, a sign that Europe's "engine room" is recovering from the depths of recession.

"Even if industrial production remains unchanged for the next two months, the quarterly growth rate would still be around 10%. This illustrates that a strong rebound in the German economy is in the making," said Carsten Brzeski, ING's chief economist for the euro zone. In addition, there is over 17 billion euros of supply due later this week as Austria, the Netherlands, Germany, Portugal and Italy all are due to sell debt in auctions, while Ireland and Spain are also potential issuers, according to analysts.

Euro zone government bond yields rose between two and four basis points across the board, with benchmark German 10-year bond yields up two bps at -0.455%. Spanish and Portuguese 10-year yields were also up about two bps each, with Southern European debt increasingly trading in line with better-rated peers following the creation of an EU recovery fund earlier this year.

The upward move in yields could be checked closer to a European Central Bank meeting on Thursday, if the signs are that policymakers are unimpressed by the indications of an economic recovery and flag further stimulus. "We see the likelihood for a strongly dovish tone to triumph, in which flexibility to increase the PEPP envelope will be the most attractive policy lever," analysts at Mizuho said in a note.

Investor expectations for long-term euro zone inflation remain muted at 1.2036%, according to the five-year, five-year forward inflation swap, a key money market gauge.

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