LONDON: Euro zone government bond yields rose on Tuesday as oil prices recovered and unexpected debt sales weighed on the region's market, which had been expected to enjoy a supply-free week.
Expectations of more Iranian supply following a nuclear deal and concerns that economic worries in China will weigh on demand have put pressure on oil this month, stripping 11 percent off the price of crude so far in July.
Bond yields fell early on Tuesday against this background as lower oil prices hurt prospects of inflation returning to the European Central Bank's target anytime soon. But the recovery in crude prices later in the afternoon brought about a reversal in bond yields as well.
Spanish and Italian 10-year yields rose 9 basis points each to 2.04 percent and 1.99 percent, respectively. German 10-year Bund yields rose 2 basis points to 0.74 percent, having traded as low as 0.685 percent earlier in the day. "It has to do with commodity prices," Rabobank market economist Emile Cardon said.
The other factor weighing on the market was the unexpected wave of debt sales, traders said.
Britain sold its longest-dated conventional government bond in a syndicated deal for a 4 billion sterling 2068 gilt.
Slovenia sold 1.25 billion euros of a 10-year bond. It was considering adding a 30-year tranche to the trade, but this was dropped, according to Thomson Reuters news and market analysis service IFR.
Portugal will offer up to 1.25 billion euros in five- and 22-year bonds on Wednesday.
"There's a fair bit of supply at the long end (of the yield curve) and there's a bit of indigestion," one trader said.
Some traders attributed the underperformance of the peripheral bonds to persistent doubts about the sustainability of the deal between Greece and its creditors to avert bankruptcy and stay in the euro zone may.
Prime Minister Alexis Tsipras has faced a revolt in the ruling Syriza party over the mix of tax hikes and spending cuts demanded by lenders.
He is expected to get a second package of measures through parliament on Wednesday with the support of pro-European opposition parties.
Meanwhile, Slovak Prime Minister Robert Fico said his country will be among the first to ask Greece to leave the euro zone if it fails to meet the conditions of further aid.
"The Greek situation is far from resolved," Rabobank's Cardon said.
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