LONDON: Euro zone bond yields drifted higher on Wednesday, reversing early falls, as the impact of strong gains in the US Treasury market faded and focus turned to higher oil prices and a keenly anticipated ECB meeting.
US Treasury yields hit almost 10-month lows on Tuesday as worries about further nuclear tests by North Korea and the impact of powerful storm Irma sparked demand for low-risk assets. When a bond's price rises, its yield falls.
That provided a positive backdrop for European bond markets, with German 10-year yields hitting their lowest levels in just over a week in early trade on Wednesday.
But as the session wore on, bond yields across the bloc reversed course, rising 1-2 basis points. Analysts said a rise in oil prices helped explain the move.
Brent crude oil prices rose almost 1 percent to their highest levels since May driven by strong global refining margins and the reopening of US Gulf Coast refineries after Storm Harvey.
"We've got the oil price higher, which is something that is often consistent with a move higher in bond yields," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
"After such a significant downward move in US Treasury yields, there's also a bit of retracement there."
Germany's 10-year bond yield was up 1 basis point at 0.35 percent, up from one-week lows hit earlier at 0.325 percent.
Two-year German bond yields rose 1.3 bps on the day to minus 0.77 percent, having earlier touched minus 0.79 percent , their lowest levels since April.
With the European Central Bank meeting on Thursday, analysts said there was a reluctance to push bond yields down too sharply despite a number of supportive factors such as the North Korea nuclear standoff.
The ECB will be closely watched for any signs the central bank has become uncomfortable with the euro's recent strength, a concern that could see it delay winding back its massive monetary stimulus scheme.
"I think they will be careful not to push any major changes, they are wary of the exchange rate," said Robert Skelton, a portfolio manager at Mediolanum Asset Management.
Yields on lower-rated debt also rebounded. Spanish 10-year bonds yielded 1.46 percent, up 3.4 bps on the day and reversing a fall of similar magnitude on Tuesday.
Germany earlier sold around 2.4 billion euros of five-year bonds.
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