LONDON: Euro zone bond yields hit one-year highs on Thursday as investors took money out of bonds and piled into stocks on signs of a reviving world economy and expectations US President Donald Trump will adopt inflation and growth-boosting policies.
Germany's 10-year bond yields, the benchmark for the region, hit a one-year high of 0.48 percent and France's equivalent hit 1 percent, following a sharp rise in US stocks and Treasury yields overnight.
The Dow Jones Industrial Average hit 20,000 for the first time on Wednesday, helping to push the yield on 10-year US Treasuries up 6 basis points to 2.53 percent. That move filtered through to other parts of the world on Thursday, and global stocks were heading towards all time highs even as bonds sold off.
"We are still on the theme of growth and the market is beginning to believe that Trump will actually do what he promised during the (presidential) campaign, so we have a shift from bonds to stocks," said DZ Bank analyst Rene Albrecht.
"But I would still be cautious because the (European Central Bank) purchases (to buy euro zone bonds) are still in place during 2017, so this could be a short-term move."
Trump has made several business-friendly decisions since taking office on Friday, including signing executive orders to reduce regulatory burdens on domestic manufacturers and clearing the way for the construction of two oil pipelines.
ITALY WARNING
In addition, comments by ECB Executive Board Member Sabine Lautenschlaeger could be pushing yields higher. She said on Tuesday the ECB could start planning an exit from its unprecedented stimulus programme in a rare public discussion about ending the bond-buying scheme.
"After Lautenschlaeger's comments, there has definitely been some talk in the market over tapering and interest rates," said KBC strategist Piet Lammens. "For the market, it is enough that the debate has started, it will start pricing it in."
Indeed, investors in money markets see around a 50 percent chance of the European Central Bank raising interest rates by January 2018, shortly after the end date of its current bond-buying scheme.
The rise in euro zone bond yields may not last long as a busy electoral calendar cranks into gear, with any political noise likely to drive demand for safe-haven government debt, particularly the better-rated paper in Europe.
"We have to be a bit wary about the reflation trade going on at the moment, especially with the political risks coming up," said ING strategist Benjamin Schroeder.
Dutch elections are due in March, followed by presidential elections in France in April and May and German elections are scheduled for September.
The calendar may get busier, after Italy's Constitutional Court ruled on Wednesday that the voting system was invalid, paving the way for early polls, possibly this summer.
The yield on Italy's 10-year government bonds hit a high of 2.21 percent on Thursday morning, its highest level since September 2015, and the spread over Spanish equivalents struck 61 bps, higher than any closing price since February 2012.
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