French bond yields edge down, but investors stay on alert

French bonds tumbled on Monday after widespread protests across France underscored difficulties the government faces in reducing its large deficit, but targeted curfews helped keep the peace overnight.

"While not pivotal to the overall process, today's vote on the revenue side of the (French) budget bill takes on a little more importance as a near-term signal," Jamie Searle, European rate strategist at Citi, said.

Meanwhile, euro zone benchmark Bund yields edged lower but traded within their recent range after last week's drop, as persistent energy price pressures kept investors from scaling back bets on further European Central Bank rate hikes.

Oil prices advanced on Tuesday, with Brent hovering around a five-month high.

Analysts said it will be difficult to materially reduce the market's bias towards further rate hikes, as a credible decline in energy prices remains elusive and winter weather is likely to play a crucial role in determining the path of gas prices.

Germany's 10-year government bond yields, the euro zone benchmark, were down 1 basis point (bp) to 3.44%. They have moved between about 3.40% and 3.50% since early this month, barring last Thursday's drop, when tech stocks took a beating.

France's OAT yields were down 2 bps at 4.90%. The yield gap between OATs and Bunds fell one bp to 146 bps. It reached 158.67 basis points in early October, the highest level since November 2011.

French far-right leader Marine Le Pen and hard-left rival Jean-Luc Melenchon extended their lead over other candidates in a poll published on Monday, a scenario analysts view as the least favourable for efforts to reduce France's fiscal deficit.

Germany's 2-year government bond yield, more sensitive to policy rate expectations, fell 1.5 bps to 3.08%.