LONDON- Euro zone bond yields rose on Tuesday, as a recovery in stocks and rising oil prices put sovereign debt markets on the back foot.
Borrowing costs across the bloc fell sharply on Monday as tensions between Russia and the West over Ukraine conspired with rate-hike worries to trigger a sharp selloff in world stocks.
But as a semblance of calm returned to markets and Wednesday's U.S. Federal Reserve policy decision loomed, yields crept back up.
Germany's 10-year Bund yield was last up 2 basis points on the day at -0.08%, above almost three-week lows hit the previous session.
A key gauge of the market's long-term inflation expectations rose to 1.86% , after falling to a two-month low at 1.82% on Monday, as oil prices climbed more than 1%.
U.S. Treasury yields were also higher as U.S. stock futures trimmed their losses.
Analysts said the near-term outlook for bond markets was positive with geopolitical worries expected to support safe-haven debt for now.
"The downdraft in global stock markets, on the back of geopolitical tensions and Fed tightening worries, remains the main driver of government bonds this week," said ING senior rates strategist Antoine Bouvet.
"None of these are valid long-term drivers for a rates forecast, but we think they will continue to push yields down in the near-term."
Italy's 10-year bond yield was flat at around 1.35% after lawmakers failed to elect a new president in an initial secret ballot on Monday.
Euro zone bond markets also faced selling pressure as they absorbed new supply. The Netherlands sold 30-year bonds and France sold a new 30-year inflation-linked bond via a syndicate of banks.
Orders for the new French bond were in excess of 18 billion euros, according to one lead manager memo.
Germany's Ifo survey showed business morale in Europe's biggest economy improved in January for the first time in seven months, highlighting better growth conditions that allow the European Central Bank to dial back its monetary support.
Markets are positioned for an ECB rate hike by year-end and price four U.S. rate rises to contain sticky inflation.
Against this backdrop, 10-year Treasury yields have jumped almost 27 bps in January, dragging German Bund yields up 10 bps.
"If you think about the relative move of the 10 year Treasury versus the 10 year Bund, I think that tells us that markets are much more optimistic about the U.S. compared to the euro zone," said Christoph Schon, senior principal of applied research at Qontigo, referring to the economic outlook.
"And maybe the fact that we're kind of still hovering around or slightly below that 0% mark, is a sign that investors are less optimistic about the euro zone."
(Reporting by Dhara Ranasinghe, Editing by Mark Potter and Ed Osmond) ((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))