LONDON: Euro zone bond yields edged up on Friday as investors turned their focus to the gradually expanding euro zone economy, following a central bank-inspired rally the previous day.
Flash purchasing managers' index (PMI) data showed a mixed picture from the bloc's two largest economies: French business activity hit a 15-month high while Germany's private sector growth slowed to a 16-month low.
Euro zone business activity as a whole has expanded at its weakest rate since the start of 2015 this month, but firms stopped cutting prices for the first time in a year.
Analysts said that with both Germany and France recording a number above the 50 mark that separates growth from contraction, the overall picture is one of a slowly improving economy, weakening the case for further stimulus from the European Central Bank.
"It is hard for the ECB to increase its purchases when PMIs point towards expansionary economic activity in the euro zone and if inflation picks up towards the end of the year," said DZ Bank analyst Rene Albrecht.
The yield on the 10-year German Bund, the region's benchmark bond, rose 1 basis point to minus 0.08 percent, a rise mirrored in most other euro zone countries on Friday.
The rise in yields follows a broad-based rally after the US Federal Reserve on Wednesday opted not to raise rates and signalled an increasingly cautious approach to future rate hikes.
"That (decision) gave comfort to the market that central banks are still in expansionary mode," said Albrecht.
Most euro zone sovereign yields fell sharply over Wednesday afternoon and through Thursday - the 10-year Bund fell 10 bps over that period - so there may be an element of profit-taking before the weekend as well, said Albrecht.
ECB Vice President Vitor Constancio added to the debate, saying on Friday morning that the central bank had hoped that the euro zone economy would respond to its stimulus measures more quickly.
He also added that he is aware that low rates over a long period could raise financial stability risks.
Lower-rated euro zone sovereign yields rose at a faster pace than their higher-rated counterparts, with Spain's 10-year bonds rising 2 bps to 0.94 percent and Italy's 10-year gaining 2 bps to 1.21 percent.
The spread between the two, at 27 bps, is close to the highest level seen since January 2014.
"We find it difficult to justify the out performance of Spain over Italy by anything else than a sharp economic divergence between the two country which we think is premature," analysts at Mizuho said in a note.
Italy's bonds have been weighed down by an upcoming Senate referendum, the result of which could have a bearing on Prime Minister Matteo Renzi's future.
However, the political situation in Spain is also uncertain, with regional rifts making a third election more likely.
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