Euro zone bond yields dipped on Monday, helped by a Friday fall in US Treasury yields following comments from US Federal Reserve chairman Jerome Powell, while Italian bonds outperformed following an unexpected credit rating outlook upgrade.
Powell said on Friday that the bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet hike interest rates.
Jens Peter Sorensen, chief analyst at Danske Bank, said the 6 basis point drop in 10-year US Treasury yields after Powell's comments on Friday was supportive of European bond markets. Bond yields move inversely with prices.
By 0720 GMT, Germany's 10-year yield, the benchmark for the euro area, was down 1 basis point to -0.10%, below the highest since 2019 it touched at -0.069% on Friday.
Developed market bond yields have risen in recent weeks, driven by accelerated bets on rate hikes from the Bank of England and US Federal Reserve and concerns that high inflation may be less transitory than expected.
Italian bonds outperformed after S&P Global revised the outlook on the country's BBB credit rating -- two notches above junk -- to positive, suggesting it could eventually upgrade it.
The agency cited the Italian government's progress in implementing reforms, which it expects will boost economic growth, as well as the European Central Bank's pandemic-era monetary policy, which it said has also supported an investment-led recovery in Italy.
Italy's 10-year yield was down 2 basis points to 0.93%, pushing the closely watched gap with German peers down slightly to 103 bps.
"This should be positive for the BTPs-Bund spread, despite that the spread is very tight and has been remarkably stable," Sorensen said.
A key market gauge of long-term euro zone inflation expectations hovered just above 2% after crossing that level -- the ECB's inflation target -- for the first time since 2014 on Friday.
Investors will eye the German business climate index survey from the Ifo institute at 0800 GMT.
In the primary market, the European Union will re-open a seven-year bond at auction to raise up to 2.5 billion euros.
And net issuance turns sharply negative this week. While Commerzbank expects around 18 billion euros of euro zone government bond issuance, the market will see nearly 80 billion euros of backflows from coupon payments and maturing bonds, analysts said.