LONDON: Bund yields rose on Monday after data showed robust growth in German industrial output in July, but they remained near two-week lows on bets the European Central Bank will beef up its asset purchases in coming months.
German factories produced 0.7 percent more goods than in the previous month, the strongest increase since December although less than the Reuters consensus forecast for a 1.0 percent rise.
The data did little to shake market bets that the ECB will opt to increase its monetary stimulus.
Those bets were also bolstered by a survey showing sentiment in the euro zone has weakened more than expected as a slowdown in China weighs on growth expectations, particularly in Germany, Europe's largest economy.
The ECB last Thursday downgraded the euro zone's growth and inflation forecasts for the next two years, and President Mario Draghi suggested the central bank was ready to expand or extend its trillion euro quantitative easing programme if needed.
German 10-year yields, the benchmark for euro zone borrowing costs, were 1.5 basis points higher on the day at 0.68 percent , having fallen 12 basis points on Thursday and Friday. Trading was expected to be thin with US markets shut for Labour Day.
"We saw a big rally late Thursday and early Friday and investors are taking a bit of a pause for breath now," said RIA Capital Markets strategist Nick Stamenkovic.
"Otherwise Bunds continue to remain well supported after Draghi's very dovish press conference last week which strengthened the prospect of further action down the road."
CHINA JITTERS
Investors were also considering prospects for a US interest rate hike this month after mixed US jobs data on Friday, which showed a slowdown in non-farm payrolls in August but an upward revision of the July number.
The data failed to give strong clues on the timing of the Federal Reserve's first interest rate hike in nearly a decade.
"We continue to expect the Fed to stand pat on September 17 with the first rate move deferred until December. The market is of a similar view albeit pricing in a very modestly higher possibility of a move next week in the wake of Friday's labour data," Rabobank strategists said in a note.
Many market participants, however, saw little prospect of a sharp upward reversal in Bund yields given the ECB outlook and persistent investor unease over China, where stocks fell more than 3 percent, resuming their sell-off following a four-day market holiday.
Fears of a slowdown in China, the world's largest economy after the United States, rattled financial markets last month.
China releases trade and inflation data on Tuesday and Wednesday.
At the euro zone's periphery, Italian 10-year yields were 1 basis point up at 1.89 percent. Spanish and Portuguese equivalents were 3 bps higher at 2.11 percent and 2.55 percent, respectively.
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