[LONDON] Euro zone government bond yields rose on Tuesday as investors returning from holidays across the globe were welcomed by sharply rising oil prices and data pointing to higher inflation in the bloc's largest economy Germany.

Inflation data from the German states of the likes of North Rhine-Westphalia and Saxony, pointed to a sharp rise in country-wide prices.

Economists polled by Reuters expect preliminary CPI data to show price growth at an annualised 1.5 per cent in December, up from 0.8 perc ent in November, and HICP at 1.3 per cent up from 0.7 per cent.

Data from the bloc's second biggest economy France showed inflation hitting its highest rate since May 2014 in December.

The likely underlying driver is a rebound in energy prices, but with inflation also expected to be bolstered in 2017 by the fiscal policies of US President-elect Donald Trump and signs of faster growth in China, the direction of travel is significant.

Oil prices hit 18-month highs on Tuesday, bolstered by hopes of a deal between oil producers to cut output.

Long-term inflation expectations in the euro zone, measured by the five-year, five-year forward rate, rose to their highest level since December 2015 and close to the ECB's near 2 per cent target. "Without any doubt, the highlight of today's data calendar is going to be the release of the German inflation rate," DZ Bank strategist Birgit Figge said. "Until just a few weeks ago, the general consensus was that upside inflation risks were very limited however ... the inflation rate scheduled to be published today is likely to reveal a significant uplift." Euro-wide numbers will be published on Wednesday, with economists expecting prices to have grown 1 per cent year-on-year, up from 0.6 per cent previously.

German 10-year bond yields, the euro zone benchmark, rose 6 basis points to an 11-day high of 0.25 per cent having hit a two-month low of 0.16 per cent on Monday.

Most other euro zone equivalents were up 6-8 basis points, with France and Ireland's at over two-week highs.

A private business survey showed China's factory activity picked up more than expected in December as demand accelerated, with output reaching a near six-year high.

That came on the heels of data showing manufacturers in Europe ramped up activity at the fastest pace in more than five years in December.

In signs elsewhere of the buoyant growth and inflation outlook, Europe's blue-chip stock index added another 0.7 per cent on Tuesday, having hit a one-year high on Monday.

REUTERS