Euro zone bond yields dip as BOJ ends negative rates

LONDON: Euro zone bond yields fell slightly on Tuesday as investors shrugged off the Bank of Japan's decision to end eight years of negative interest rates and looked ahead to the Federal Reserve's decision on Wednesday. Germany's 10-year bond yield, the benchmark for the euro zone, was last down 1.5 basis points (bp) at 2.43%. Yields move inversely to prices.

The benchmark German yield dipped slightly after data showed German investor morale improved more than expected in March, with more than 80% of survey respondents expecting the European Central Bank to cut interest rates in the next six months. The focus of global markets on Tuesday was on the Bank of Japan's decision to raise interest rates into positive territory and to end the yield-curve control policy that aimed to anchor domestic government borrowing costs.

Bank of Japan policy is of major importance to Europe, because Japanese investors are big holders of euro zone government debt. Some analysts have raised concerns that more attractive returns in Japan could cause money to rush home, raising European borrowing costs. Yet Michael Rottmann, head of fixed income strategy at UniCredit Research, played down those fears on Tuesday.

"We doubt it will have a tremendous and long-lasting effect on Western bond markets," he said, adding that the BOJ struck a cautious tone. "The Fed and ECB are expected to start their own easing cycles in June... it is highly doubtful whether JGBs will become so much more attractive that falling Japanese demand for Western curves outweighs the benefits from the easing cycles in the U.S. and euro zone."

Yields on French 10-year bonds, where Japanese investors have a big presence, were down 1 bp at 2.87%. Investors now turn their focus to the Fed's interest rate decision on Wednesday. It is expected to leave borrowing costs on hold but traders will scrutinise the new economic projections for signals about the direction of rates.

Global bond yields have risen in recent weeks as U.S. economic data has come in stronger than expected, causing markets to cut their bets on big rate cuts from the biggest central banks this year. Germany's 2-year bond yield, which is sensitive to ECB rate expectations, was down 3 bps at 2.88% on Tuesday, although it remained around 50 bps higher for the year.

European Central Bank policymaker Pablo Hernandez de Cos repeated his expectation on Tuesday that the ECB could start cutting interest rates in June. The Bank of England will set interest rates on Thursday, although it too is expected to hold rates steady.