LONDON: Euro zone bond yields crept higher on Tuesday as the European Central Bank put a temporary halt to its asset purchase programme over the Christmas break.
The pause in the 1.5 trillion euro scheme, set to last until Jan. 4, removes a pillar of support for investors at a time when liquidity is low and inconclusive elections in Spain have created price ructions.
German 10-year bond yields -- the bloc's benchmark -- rose 3 basis points to 0.56 percent, while most other euro zone equivalents rose 1-3 bps. Spanish yields have risen around 8 bps since Sunday's vote pointed to weeks of difficult coalition talks.
"The market is very illiquid at this time of year and with the purchase programme ending you don't have that keeping the downward pressure on yields," Marco Brancolini, European rates strategist at RBS, said.
ECB purchases have been slowing as markets enter the festive period. Data on Monday showed the central bank bought 11.18 billion euros of public sector assets last week, down from 13.60 billion euros last week and 16.46 billion euros before that.
While purchases also slowed during summer holidays, the Christmas break marks the first time purchases have stopped completely since the scheme was launched in March.
And it comes at an unfortunate time, with political instability posing a risk to the bloc's nascent economic recovery in 2016.
Spain is expected to be in political limbo for weeks after Prime Minister Mariano Rajoy's centre-right People's Party fell well short of a majority, and left-wing challengers look unlikely to get enough seats to govern by joining forces.
A deadline of Jan. 13 has been set for a first round of talks between the parties, coinciding with the day that parliament is due to resume. Many now expect fresh elections in the new year.
Italian Prime Minister Matteo Renzi said the failure of Spain's PP to regain power in Sunday's election highlighted the shortcomings of EU-backed austerity policies at both the political and economic level.
The Spanish vote followed ballots earlier this year in Portugal and Greece which also saw the ousting of parties that had pursued rigorous economic belt-tightening.
ECB governors have often said monetary policy can only go so far in stoking the euro zone economy and that structural reforms are needed in many of the bloc's major economies.
Oil remains another wildcard for investors with crude hovering around 11-year lows and clouding the outlook for global inflation.
In a sparse calendar, investors will take an interest in U.S. growth data due later on Tuesday, hoping it will not raise questions over the Federal Reserve's decision earlier this month to raise rates for the first time in nearly a decade.
Economists polled by Reuters expect a final print of 1.9 percent, down slightly from the previous 2.1 percent reading.
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