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ECB taper fears leave euro zone bonds battered and bruised

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Euro zone government bonds steadied on Friday from another battering that left markets nursing heavy losses as investors reassess the outlook for fixed income on the growing view that an era of ultra-cheap money is gradually drawing closer to an end.

[LONDON] Euro zone government bonds steadied on Friday from another battering that left markets nursing heavy losses as investors reassess the outlook for fixed income on the growing view that an era of ultra-cheap money is gradually drawing closer to an end.

Euro zone growth is picking up but underlying inflation is still weak, so the European Central Bank should adjust its policy carefully and flexibly to avoid abrupt market moves, ECB board member Benoit Coeure told two European newspapers.

Those comments followed a day of heavy selling that saw yields across the bloc jump as much as 12 basis points.

Minutes from the ECB's latest policy meeting released on Thursday showed policymakers are open to a further step towards reducing their monetary stimulus. That has added to a growing perception that major central banks are looking to begin stepping away from their ultra-easy policy stance.

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On Friday, Germany's benchmark 10-year Bund yield was flat around 0.57 per cent, but held above the 0.50 per cent milestone breached on Thursday that catapulted it to 18-month highs.

In the space of just over a week Bund yields have doubled, with German bonds bearing the brunt of selling in euro zone debt markets.

"The market is unlikely to keep selling off without fresh information...But sentiment remains bearish," said Orlando Green, European fixed income strategist at Credit Agricole.

Most other euro zone bond yields were also largely flat on the day, while Italian and Spanish 10-year bonds yields touched two-month highs.

Jitters about tighter monetary policies from major central banks have rippled throughout global markets, hurting stocks and supporting the euro.

US Treasury yields rose on Thursday on the prospect of hawkish global central bank policies and concern that rising oil prices could spur inflationary pressures.

Focus was expected to turn to US non-farm payrolls data later in the day.

The 10-year Japanese government bond (JGB) yield initially reached 0.105 per cent on Friday, its highest since February, before slipping back after the Bank of Japan said it would buy an unlimited amount of 10-year JGBs.

The BOJ aims to keep the 10-year JGB yield "around zero per cent".

REUTERS

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