LONDON: Disappointing German growth data and an uncertain outlook for political and monetary policy in the euro zone capped bond yields on Tuesday, as France and Ireland's 10-year borrowing costs briefly converged for the first time since 2007.
The German economy, the euro zone's biggest, expanded 0.4 percent in the final quarter of 2016, slightly below expectations, tamping down the inflation outlook.
Bond yields have been rising since September on signs of a strengthening global economic outlook, stronger inflation and an expected reduction in monetary stimulus.
"In general there is an upward trend for yields, and this won't go away, but the moves today show there are still many factors influencing markets," DZ Bank strategist, Daniel Lenz, said.
Inflation in the single currency bloc beat expectations to hit 1.8 percent for the month of January, close to the European Central Bank's target of below 2 percent and the highest since February 2013. This added to upward pressure on Bund yields, which have been rising from their September trough of minus 0.16 percent.
But concerns around the future of the euro zone, prompted by upcoming elections in France and Germany as well as political uncertainty in Italy, and questions around the pace of US interest rate hikes have tempered this trend, Lenz said.
France and Ireland saw their 10-year borrowing costs converge briefly for the first time since October 2007, with the wide-open presidential race pushing France's bond yields to 14-month highs in recent weeks.
Meanwhile, the yield on Italy's 10-year government bond fell 2 basis points to 2.2 percent, after former Italian Prime Minister Matteo Renzi called on Monday for a leadership contest in his ruling Democratic Party.
"This perpetuates the uncertain outlook for Italian politics, but the market now feels that elections will happen later rather than sooner and that's giving some comfort," said Rabobank strategist Richard McGuire.
US Federal Reserve Chair Janet Yellen goes to Congress on Tuesday for the first time since Republicans took control of the White House and her comments will be scrutinised for hints about the timing of prospective rate hikes.
"Any change in the economic outlook is likely to skew dovish following the last jobs report," Citi analysts said in a note.
US job growth surged more than expected in January but wages barely rose, creating something of a mixed picture for the Fed as wage growth is one of the main drivers of inflation.
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