LONDON: Euro zone bond yields rose on Wednesday, edging away from this week's lows, as upbeat data and a rally in stocks lifted demand for risk assets at the expense of safe-haven debt.
European shares chased Asian stock markets higher, with positive economic news from Australia to the United States boosting risk appetite.
News on Tuesday that the Institute for Supply Management's (ISM) index of US factory activity, a closely watched measure of the American manufacturing sector, rose more than expected last month pushed US Treasury yields to near two-week highs.
The knock-on impact in European bond markets was higher yields across the region.
But analysts cautioned against reading too much into the moves before next week's European Central Bank meeting, which is expected to conclude with at least a 10 basis point cut in the deposit rate to minus 0.40 percent to boost inflation and economic growth.
In a sign that demand for euro zone bonds remains firm, Germany successfully sold about 3.31 billion euros of five-year bonds with an average yield of minus 0.36 percent, a record low.
"Ahead of the ECB meeting and given the consolidation we've seen in the bonds markets since Monday, this auction was viewed as an opportunity to buy the dip in yields," said Commerzbank interest rate strategist David Schnautz.
"Investors are ok with buying yields at record lows in the primary market," he added. Germany's benchmark 10-year Bund yield rose 4.5 basis points to 0.19 percent -- about 9 basis points above 10-month lows hit on Monday.
A move back towards last April's record low of 0.05 percent has led to talk about whether Bund yields could slip into negative territory.
In a note, analysts at Societe Generale said 10-year Bund yields could break below 0 percent during the second quarter. Two and five-year bond yields also backed away from this week's record lows and were 1-2 basis points higher.
"There is some correction in bond markets and at around 17 basis points, core euro zone bond yields still reflect some pessimism about the economy," said Martin van Vliet, senior rates strategist at ING. "Going into next week's ECB meeting there will be a lid on how far yields climb."
Spanish bond yields were 1.7 basis points higher at around 1.52 percent ahead of a confidence vote in parliament on the Socialists' proposal for a ruling coalition.
Spain's acting Prime Minister Mariano Rajoy said his party would oppose Socialist leader Pedro Sanchez's bid to form a government, suggesting a parliamentary vote later in the day will fail to break the country's political deadlock.
Analysts said upcoming supply and political uncertainty could keep Spanish bonds on the back foot. Spain and France are expected to issue almost 14 billion euros worth of bonds on Thursday, said Commerzbank's Schnautz.
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