Euro zone bond yields nudge off recent lows

Germany's benchmark 10-year Bund yield was last up 1.2 basis points on the day at -0.56%, having briefly touched a two-week high at -0.54%. Trading ranges across euro zone debt markets have been tight in recent sessions, with bond analysts expecting that to remain the case ahead of the ECB meeting.

Euro zone government bond markets succumbed to modest selling on Tuesday, pushing yields off recent lows, as brighter sentiment in world markets dented demand for fixed income.

Euro zone consumer prices fell by a bigger than expected 0.3% year-on-year in November pulled down by a sharp drop in energy costs, a flash estimate from the European Union's statistics office Eurostat showed. It was the fourth consecutive month of negative annual inflation.

"Given that core inflation is stubbornly low and will recover even more slowly than previously expected due to the second lockdown- this will be reflected in the macroeconomic projections that the ECB will present next week," Bert Colijn, senior economist for the euro zone at ING said in a note. "As this has been the base case for some time now, it will without a doubt make the ECB loosen policy once again."

With the European Central Bank widely expected to deliver more stimulus at its Dec. 10 meeting, bond yields drifted higher. Germany's benchmark 10-year Bund yield was last up 1.2 basis points on the day at -0.56%, having briefly touched a two-week high at -0.54%.

Trading ranges across euro zone debt markets have been tight in recent sessions, with bond analysts expecting that to remain the case ahead of the ECB meeting. Southern European bond yields also edged up, with 10-year Italian bond yield briefly rising to two-week highs around 0.64% .

Portuguese and Spanish 10-year bond yields were up 2 bps each, pulling away from recent lows. Christian Lenk, a rates strategist at DZ Bank in Frankfurt, said some unease about the euro zone's recovery fund could be weighing on peripheral debt.

Poland and Hungary are blocking about 1.8 trillion euros worth of EU funds, including hundreds of billions due to be disbursed soon to help pull the 27-country bloc out of a double-dip recession caused by a second wave of COVID-19. "What's continuing to weigh on the periphery a little is that there is no progress on the Next Generation EU fund," said Lenk.

"As time ticks on, this becomes more of a concern."