Euro zone yields rise, Italy outperforms with Mattarella new president

German bond yields rose on Monday against a backdrop of higher risk appetite and inflation worries, while Italian borrowing costs fell after parliament re-elected Sergio Mattarella head of state, leaving former ECB chief Mario Draghi as prime minister.

Analysts see a reduction of Italian risk premium with Draghi at the helm of the government as they expect him to pursue structural reforms in government administration, the judiciary and the tax system though others warn he may have a hard time pushing through his agenda after divisions over the presidency.

Mattarella was re-elected for a second term on Saturday, but the failed attempts to replace him during seven rounds of balloting have left scars, with potential repercussions for political stability.

Italian parties to elect outgoing president, leaving Draghi as PM

Equities staged a rebound in Europe on Monday, with the Stoxx 600 up 1%, but the standoff over Ukraine remains a thorn in the market's side.

Italy's 10-year government bond yield fell 5 basis points to 1.3%, after hitting its lowest since Jan. 14 at 1.282% . The spread between Italian and German 10-year yields tightened by 6.5 bps to 133 bps.

Meanwhile, investors' focus shifted towards this week's inflation data and potential signals from the European Central Bank on the timing of its future monetary tightening.

Germany's 10-year government bond yield, the bloc's benchmark, rose one basis point to -0.034%.

"Crucial inflation data for January could put the ECB's drawn-out exit planning to the test ahead of the Council meeting on Thursday," Commerzbank analysts said in a note to clients.

"Following the unpleasant pointer from Belgium on Friday, where the national CPI bounced to 7.6% in January (from 5.7% in Dec), the North-Rhine Westphalia (NRW) consumer price index this morning provided hardly any relief," they added.

The German NRW consumer price index fell to 5.1% year-on-year from 5.2% in December, but the number of German manufacturing companies reporting bottlenecks decreased to 67.3% in January from 81.9% in December.

Portuguese government bond yields were in line with the euro zone benchmark, with the 10-year rising 1.5 bps to 0.636% after general elections on Sunday.

Centre-left Socialists won a parliamentary majority, securing a solid new mandate for Prime Minister Antonio Costa, a champion of balanced public accounts.