By Sophie Kiderlin

Euro zone bond yields nudged higher on Tuesday as investors weighed the longer-term outlook for borrowing, with potential French political risk and German budget and fiscal policy in focus.

Germany's 10-year yield (DE10YT=RR), the benchmark for the euro zone, was last up by around 2.2 basis points to 2.966%, having earlier reached its highest since June 19.

That marked its seventh straight session of gains, after it advanced last week on rising U.S. and Japanese bond yields and owing to investor attention moving to any potential shifts in the borrowing landscape.

Yields had previously been pulling back following the interim U.S.-Iran deal, which sent oil prices lower and eased worries about the war's impact on inflation, growth and central bank interest rates.

However, European Central Bank Governing Council member and Bank of Italy Governor Fabio Panetta on Tuesday said that the outlook for the euro zone economy remains fragile.

ECB board member Isabel Schnabel said on Monday that the euro zone's economy was not back to its state before the Iran war despite the drop in oil prices, as core inflation remained strong and price pressures continued.

Money markets are pricing in one more rate increase from the central bank this year.

Germany's 2-year yield (DE2YT=RR), which is more sensitive to interest rate expectations, was last up 2.7 bps to 2.5686%.

FRENCH POLITICS IN FOCUS

Meanwhile, a Paris court will rule on Tuesday on French far-right leader Marine Le Pen's appeal against an election ban for misusing European funds.

The ruling will decide whether Le Pen can run for president in 2027 - with Jordan Bardella otherwise set to become the National Rally's candidate - as the looming election has renewed concerns about French political risk.

Tuesday's verdict itself should, however, have only a limited impact on markets, Francesco Pesole, FX strategist at ING said.

"We suspect OATs and the euro can be seriously unnerved only by a surge in support for left-wing candidates like Jean-Luc Mélenchon at this stage," he said.

"We think markets have largely priced in a Le Pen or Bardella win, and that either would deliver sufficient fiscal prudence to limit bond volatility."

French 10-year bond yields (FR10YT=RR) were last up 1.5 bps to 3.7486%.

Elsewhere, the German cabinet on Monday approved the first draft of the 2027 budget. It allocates total spending of €555.4 billion ($634.2 billion), with total borrowing amounting to €203.6 billion, as Germany boosts investment and defence spending to shield its sluggish economy from war-related energy shocks and years of underinvestment.