LONDON: Yields on higher-rated euro zone government bonds fell from the day's highs on Tuesday after data showing core inflation in the bloc held stable.
German government bond yields rose 3 basis points in early trade after consumer prices in France and Spain rose well above expectations in January, but this move was tempered once data for the whole euro zone came out.
Inflation data for the bloc topped expectations at 1.8 percent, in line with the European Central Bank's target of close to but below 2 percent.
But with the data showing a more modest rise in euro zone core inflation, which strips out volatile energy and unprocessed food prices, the sell-off abated. "We did see a bit of a sell-off this morning after the Spanish and French inflation numbers, but the core inflation for the euro zone was in line with expectations and that's the number that (ECB President Mario) Draghi flagged at the last (ECB) meeting," said Mizuho strategist Antoine Bouvet.
Core inflation was stable at 0.9 percent year-on-year in January, according to Eurostat.
The yield on Germany's 10-year government bond , the regional benchmark, was up 1.3 basis points at 0.46 percent by 1315 GMT, off a high of 0.49 percent. French and Dutch equivalents were also slightly higher.
Some analysts have suggested signs of economic recovery, including faster price rises, could make it more likely the ECB will slow or unwind its bond-buying stimulus programme.
Yields on bonds of the lower-rated euro zone countries, whose borrowing costs have fallen as a result of the ECB programme, were flat or lower.
Italy's 10-year government bond yields were flat on the day at 2.3 percent while Portuguese equivalents were down 1.5 bps at 4.23 percent.
Any rise in yields would be tempered by political uncertainty in the United States and Europe, analysts said. Curbs on travel to the United States ordered by President Donald Trump brought home to investors that he is serious about implementing his campaign pledges and led to a sell-off in US stocks on Monday.
"There is a feeling that maybe we have been too exuberant since he was elected, that he may be open to fiscal measures but on the other hand he has the potential to behave erratically," said DZ Bank strategist Christian Lenk.
Upcoming French elections have also been a concern for the market on prospects of far-right leader Marine Le Pen creating an upset similar to the Brexit vote or Trump's election, and pushing for a French exit from the euro zone.
The French economy picked up speed in the final quarter of 2016, after a lacklustre performance in the previous two, thanks to consumer and investment spending.
Greek bond yields spiked on Tuesday after a German Finance Ministry spokesman said further financial assistance for the debt-laden country depended on the successful completion of a review of its bailout programme and the participation of the International Monetary Fund. The yield on 10-year Greek government bonds was up 41 bps at a seven-week high of 8.18 percent.
Copyright Reuters, 2016
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