LONDON: The bond rally fuelled by the Bank of Japan’s plans for massive money printing paused on Tuesday for investors to absorb fresh debt sales, pushing yields on highly-rated euro zone bonds back up from record lows.
Japan’s central bank unveiled an unprecedented $1.4 trillion stimulus plan last week, prompting speculation that some of the cash will spill over into other regions. This pushed yields on French, Dutch, Austrian or Belgian bonds sharply lower.
Analysts say yields could fall further in the near term, although doubts about how long a weakening economy such as France would be able to borrow at such low levels were seen limiting the move.
Dutch 10-year bond yields were 7 basis points higher on the day at 1.51 percent, pulling back from last week’s record lows of 1.384 percent, after a sale of 20-year government bonds.
Finland was due to sell around 4 billion euros of a new 10-year benchmark via a syndicate. The books were closed earlier for pricing later in the day, with demand being twice the amount on offer, according to IFR, a Thomson Reuters service.
Finnish 10-year yields rose 6 bps to 1.49 percent. “We had all this supply today after a big rally so there’s a bit of profit taking,” one trader said.
Once the debt auctions are out of the way, however, yields could resume edging lower, analysts said.
“There is a little bit more room to go, but the air is getting thinner,” said DZ Bank rate strategist Christian Lenk, adding that the bonds most at risk of reversal were the French.
“The market is completely ignoring the bad news from France. Everybody is buying France because it offers a 50 bps pick-up over Germany,” he said.
Recent economic indicators have painted a bleak outlook for the French economy. The government is expected to miss its 2013 budget deficit target and analysts warn the country has made little progress in reforming its inflexible labour markets.
French 10-year yields were 7 bps higher on the day at 1.82 percent – offering a 54 bps premium over equivalent German Bunds having hit a record low of 1.711 percent on Monday.
STAYING ON SIDELINES
Some investors, meanwhile, were reluctant to buy into the idea that euro zone bonds will eventually benefit from Japanese flows.
“We haven’t got involved in semi-core markets over the past couple of weeks and it’s unlikely that we will,” said Sanjay Joshi, head of fixed income at London and Capital, which manages $1.5 billion in fixed income assets.
“Certainly Japan’s (stimulus) option does change the plan for investors elsewhere as well. But the way I tend to look at it is that the first (to gain) are (US) Treasuries, followed potentially by (UK) gilts and Canadian and Aussie bonds before the euro zone.”
Joshi said he has recently bought US Treasuries and Canadian bonds, on the view that Japanese investors would regard most euro zone bonds as too volatile too prefer them over other highly-rated markets.
In Germany, Bund futures were 45 ticks lower on the day at 145.63, with some traders saying a strong start to the US company earnings season was weighing on low-risk debt.