LONDON Feb 10 Italy's government bond yields held near eight-year lows on Monday before the country releases industrial output figures, kicking off a key week for investor perceptions about the euro zone growth outlook.
Recent economic data have been one of the main drivers behind a rally in lower-rated euro zone bonds this year, with investors betting that an economic recovery will help the region leave its sovereign debt crisis behind.
A pick-up in euro zone growth is especially important for the euro zone's most indebted states - Italy amongst them - as it would help improve their debt to economic output ratios to boost investor confidence.
Italy will publish industrial output figures at 0900 GMT, with analysts in a Reuters poll expecting a 0.4 percent increase on the year.
French industrial production dropped 0.3 percent in December from November, falling short of expectations for a flat reading.
The euro zone and its constituent parts report fourth-quarter economic growth numbers at the end of the week.
"Peripheral markets have performed well despite deteriorating risk appetite, and the reason is that we've seen increasing signs of an economic recovery," RIA Capital Markets strategist Nick Stamenkovic said.
"If it (the industrial output data) provides concrete evidence the worst is over for Italy that will be positive for Italian bonds."
Ten-year Italian bond yields were a tad up at 3.70 percent. Below 3.666 percent, Italian yields will hit their lowest since 2006, according to Reuters historical data.
Most euro zone markets were little changed, with the lower-rated ones having weathered a weaker-than-expected U.S. jobs report on Friday.
Any fall in Italian yields is likely to be limited by supply pressure, with Rome planning to sell debt on Thursday.
Details about the size and the maturities will be announced later on Monday. Citi and Commerzbank strategists expect Rome to sell three-, seven- and 30-year bonds. Barclays strategists expect Rome to sell three-, seven- and 15-year bonds.
"The environment (for Italian bonds) should remain supportive, with (bond) auctions being the only near-term threat," Luca Cazzulani, rate strategist at UniCredit in Milan, said in a note.
German Bund yields, the benchmark for euro zone borrowing costs, fell 0.7 bps to 1.657 percent.