LONDON: Euro zone bond yields edged back from record lows on Friday, helped by Thursday's almost 5-percent rise in oil prices and support from San Francisco Federal Reserve chief John Williams for a rise in interest rates this year.
Oil was down marginally on the day, but is broadly back at three-week highs on expectations that the OPEC group of exporters will discuss ways to prop up a market that continues to be dogged by oversupply.
Bonds are sensitive to sharp moves in crude prices because of the implications they can have for future inflation.
The likelihood that price growth is heading higher was one of the reasons Williams gave in an interview on Thursday in which he called for tighter monetary policy in the United States.
The Fed raised rates last December for the first time in nearly a decade, but did not continue to lift them as it had anticipated in order to cushion the economy from a slowdown in China and head off another round of financial market turmoil.
Investors see around a 45 percent chance for a further hike this December, according to CME's FedWatch Tool, a move which could push up bond yields globally.
German 10-year bond yields, the euro zone benchmark, rose 1.2 basis points to minus 0.15 percent on Friday, pulling away from a record low of minus 0.20 percent hit early last month in the wake of Britain's shock vote to leave the European Union.
"Since we had that drop to a record low in July, German bond yields have been pretty stable and oil prices will have a role in where we go from here," RBC's chief European macro strategist Peter Schaffrik said.
Most other euro zone yields were slightly higher on the day after a mixed bag of economic growth data from the major euro zone states. Overall growth fell in the second quarter to 0.3 percent, although the slowdown in Germany was less pronounced than economists had forecast.
Italy's economic output was flat on the quarter compared to expectations that it would grow 0.2 percent, putting official growth targets in jeopardy and piling pressure on Prime Minister Matteo Renzi.
The yield on Italy's 10-year government bonds moved 1.6 bp higher to 1.074 percent, off Thursday's lows of 1.05 percent before retreating.
"Italy is already under a bit of pressure with the banking situation and the Senate referendum and what that means for Renzi," said Owen Callan, an analyst at Cantor Fitzgerald.
"It's concerning given how high the debt to GDP ratio is and just how much bigger Italy is compared to other countries in the region. It is a big problem for the eurozone that one of its biggest economies is unable to generate growth," he said.
Germany grew 0.4 percent on the quarter, Spain 0.7 percent and the Netherlands 0.6 percent. France, however, was also flat on the quarter.
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