LONDON, Jan 10 (Reuters): Major government bond yields hit multi-month highs on Wednesday on heavy supply and as investors reevaluated the likelihood of continued easy-money policies by the world's major central banks.
Speculation the Bank of Japan (BoJ) could start to withdraw its stimulus this year after it trimmed bond purchases this week put upward pressure on bond yields across the board and sent the yen to its highest level against the dollar in over a month.
The 10-year US Treasury yield hit 2.57 per cent for the first time since March last year. That has caused the 2-10-year US yield curve to steepen to 59 basis points - a jump of 10 bps this week.
Most euro zone government bond yields were 1-2 basis points higher at the open.
Germany's 10-year bond yield hit its highest level since the October European Central Bank meeting when policymakers first announced the extension of its bond-buying scheme, with one trader citing heavy supply as the trigger for the move. "So much focus has been on the Federal Reserve and the ECB, but everyone sort of forgot about the Bank of Japan.
They sort of assumed that the BOJ would keep its foot in hard on the accelerator," said Michael Hewson, chief markets analyst at CMC Markets in London.
"When they (the BoJ) reduced their bond-buying yesterday, people suddenly thought maybe we've underestimated the BoJ, maybe we should pay more attention to what their future policy path should be like ... and I think it's caused a reevaluation of risk in bond markets."
Investors also said the rise in yields across the board is giving rise to some speculation among investors as to whether this is the start of a sustained bear market for bonds. Rabobank analysts on Tuesday sent out a research note asking the question: "Have we finally entered a bond bear market?"
The analysts said in the note a global recovery and potential central bank action are possible drivers of a sustained sell off in bonds, though they stopped short of saying that this trend has begun.
Oil prices extended gains, with U.S. crude futures hitting a three-year high on a tight supply balance due to OPEC-led production cuts and a sharper fall in US crude inventories.
Rising oil prices could fan inflation down the road, which could be detrimental to some countries that have been prone to high inflation.
US West Texas Intermediate (WTI) crude traded at $63.42 a barrel, up 0.7 per cent for the day, after having risen as high as $63.57 earlier. Brent crude rose 0.5 per cent to $69.15 per barrel, staying near its highest level since mid 2015.
In the currency market, the yen rose to its highest in over a month, extending the previous day's gains after the BoJ trimmed the amount of long-dated bonds it is buying.
While the move was in line with the BoJ's subtle reduction in its bond buying over the past year, or 'stealth tapering', the reaction highlighted how sensitive markets are to a pullback in Japan's massive stimulus.
"I don't think yesterday's operation is a hint of a policy change. But it highlighted the fact that unwinding of central bank stimulus will be a main theme this year. We could see more moves like this," said a currency trader at a US bank.
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