Euro zone yields edge up as investors ponder Fed rate path

LONDON: Euro zone bond yields hovered above recent lows on Tuesday as sagging oil prices and weak U.S. economic data left investors wondering whether the Federal Reserve would firm its position on the timing of a future rate hike.

With the Fed due to begin its two-day policy meeting later on Tuesday, investors are waiting to see whether it will drop the word "patient" from its statement on the timing of a hike.

Any move by the world's largest economy towards raising rates for the first time since 2006 would ripple across global markets, even in Europe, where the European Central Bank has set sub-zero rates and is pumping a trillion euros into the euro zone economy.

"The major driver in the euro zone remains the buying that is taking place ... but even then there could be short-term spillover effects from any change of wording from the Fed," said DZ Bank strategist Christian Lenk.

Economists polled by Reuters were almost evenly split on whether the Fed will raise rates in June or wait until later in the year.

The drag on inflation caused by slumping oil prices -- which hit a six-week low on Monday -- may encourage the Fed to remain cautious. So could weak U.S. manufacturing, industrial output and housing data seen this week.

German 10-year yields -- the euro zone benchmark -- edged up 1 basis point on Tuesday to 0.28 percent. They reached a record low of 0.188 percent last week.

Italian 10-year yields rose 5 bps 1.22 percent as Italy prepared to sell a new March 2032 bond.

Yields tend to move higher ahead of sales as investors make room in their portfolios for the new supply. The ECB also has 'blackout' rules that prohibit it from buying newly issued debt or bonds of a similar maturity around the time of sales.

Spanish yields, which tend to trade in tandem with Italy's, were also up 5 bps at 1.22 percent. All other yields were unchanged or marginally higher but near this week's record lows.

Rabobank strategist Lyn Graham-Taylor said some investors were taking profit from last week's rally, before the Fed meeting.

Traders expected the pace of ECB bond buying, with nearly 10 billion euros of bonds bought in the first three days of the scheme last week, to ease. The ECB will buy 60 billion euros of mostly government debt a month.

Helped by low oil prices and a revival in bank lending, the European Central Bank hopes its bond-buying scheme will revive the frail euro zone recovery.