Oil price rise pushes up euro zone debt yields

LONDON: Government bond yields in the euro area nudged up on Tuesday, as oil prices rose to their highest levels this year and the European Central Bank's Benoit Coeure said he sees no argument for tiered deposit rates.

Still, the outlook for bond markets remained favourable, analysts said, given that last week's closely-watched manufacturing activity data from Germany, the bloc's biggest economy, suggested economic conditions remained weak.

Germany's benchmark 10-year bond yield was up two basis points at 0.04 percent in early trade but was still  six bps below the four-week highs hit before Thursday's PMI data.

"The 10-year Bund yield will remain near zero percent if we don't see a rebound in sentiment indicators," said DZ Bank rate strategist Sebastian Fellechner, adding that Wednesday's German Ifo sentiment survey may provide the next steer for markets.

Brent crude oil prices rose to their highest level this year  after Washington announced all Iran sanction waivers would end by May, pressuring importers to stop buying from Tehran.

This lifted inflation expectations and alongside comments from the ECB policymaker Coeure put some upward pressure on bond yields.

In an interview published on Tuesday, Coeure said that lenders should focus on their costs rather than blame the ECB's negative rate for their low profits and hinted that the upcoming round of multi-year loans to banks should not be as generous as the previous.

Growing talk that the ECB could take action to offset the impact of negative rates has fuelled speculation that interest rates in the bloc will remain stuck below zero percent for a protracted period, helping push down bond yields in the past month.

Across the euro area, 10-year bond yields were 1-2 bps higher on the day , with Italian bond yields up almost five bps at 2.64 percent.

Analysts said tensions within the ruling coalition government helped explain the underperformance in Italian bonds.

Italy's coalition partners clashed angrily on Friday over mutual allegations of corruption, with relations between the League and 5-Star Movement at their lowest ebb since they formed a government last May.