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 3 basis points to 2.9737%, having earlier reached its highest since June 19.
That marked its seventh straight session of gains, after advancing last week on rising U.S. and Japanese bond yields and by 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 board member Isabel Schnabel said on Monday 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.
Her comments left the door open for a second interest rate hike from the ECB as 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 2.9 bps to 2.5707%.
Traders were also focused on political developments in Europe this week, with the German cabinet on Monday approving the first draft of the 2027 budget. It allocates total spending of €555.4 billion ($634.16 billion), with total borrowing amounting to €203.6 billion, as Germany moves to ramp up investment and defence spending to shield its sluggish economy from war-related energy shocks and years of underinvestment.
Elsewhere in Europe, 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 the looming election renewing concerns about French political risk.