German bond yields tracked U.S. Treasury yields lower and fell below the ECB's policy rate on Tuesday for the first time in nearly two weeks ahead of a U.S. retail sales report that is expected to add to data showing slowing economic momentum.
Risk sentiment was also dampened by a further spike in Delta variant-related COVID-19 cases and uncertainty following the Taliban's seizure of power in Afghanistan, which sent European stock markets and U.S. stock futures falling.
Industrial production, however, is expected to have increased 0.5% month-on-month, slightly higher than in June.
Following an unexpected sharp fall in U.S. consumer sentiment on Friday that sent bond yields tumbling, signs that consumer spending faltered by a larger degree, given a resurgent Delta variant, could prompt yet another market rethink of the U.S. Federal Reserve's stimulus-tapering timeline.
Data on Monday showed Chinese factory output and retail sales growth slowing sharper than expected, adding further uncertainty to the economic growth picture. That usually benefits safe-haven bond prices, which move inversely with yields.
"The focus is on U.S. data, scoured for any hints of further economic deceleration and leaving the bias for lower rates intact for now," ING analysts told clients.
Germany's 10-year yield, the benchmark for the bloc, fell as much as 3 basis points on Tuesday, dipping below -0.50%, the European Central Bank's policy rate, for the first time since Aug. 5. By 0959 GMT, it was down 2 bps to -0.49%.
Italy's 10-year yield was down similarly to 0.55%, bringing the closely watched gap with German equivalents to 103 bps
The inflation-adjusted, or real yield for the euro area as a whole as measured by the swap market, was near a record low at -1.74%.
Michael Leister, head of interest rates strategy at Commerzbank, said higher bond buying by the ECB during the summer period compared to last year likely added to the downward pressure on bond yields.
The ECB's combined average conventional public sector bond purchases and pandemic emergency bond purchases in August so far have been 95% of the April-July average, according to ING.
In the primary market, Germany raised 4.809 billion euros from the auction of a new two-year bond.
Focus will be on a speech by Fed chairman Jerome Powell following the European markets close at 1730 GMT.
(Reporting by Yoruk Bahceli; Editing by Anil D'Silva and Bernadette Baum) ((Yoruk.Bahceli@thomsonreuters.com; +44 20 7542 7571; Reuters Messaging: email@example.com))