LONDON: German Bund yields rose on Friday, with investors preferring equities after minutes of the most recent Federal Reserve meeting suggested that the US central bank was not in a hurry to raise interest rates.
A bounce in commodity and energy prices -- whose sharp falls in recent months pushed bond yields down by weakening the inflation outlook -- contributed to an increase in yields across the euro zone.
The minutes showed the Fed had thought the US economy was close to warranting a rate hike, but decided it was prudent to wait for evidence that a global economic slowdown was not knocking the United States off course. Minutes from the European Central Bank's Sept. 2-3 policy meeting showed policymakers were warned of risks coming from emerging markets.
Expectations that ECB President Mario Draghi will extend the bank's trillion euro stimulus programme have grown in the past month. While loose monetary policy is usually supportive for bonds, benchmark Bund yields have broken below 0.50 percent only once since June - for a few hours last week.
"We have see quite often in the past that as soon as Bunds reach around 50 basis points, more than a few investors say 'this level is not sustainable we are not going to buy here'," DZ Bank rate strategist Christian Lenk said.
Many in the bond market are wary after making losses on a rapid bounce in Bund yields from near-zero levels in May, a move that coincided with a brief uptick in inflation.
When yields are so low, an increase of just a few basis points can cause major losses for investors as they lose the protection of coupon payments, which are close to zero as well.
As a result, instead of joining the rally in shares -- as they have often done in recent years when reacting to signs of more central bank stimulus -- bonds have been ditched lately during periods of higher risk appetite.
German 10-year Bund yields were up 1 basis point at 0.60 percent, almost a 10 basis point rise in a week in which below-forecast economic data strengthened the case for further monetary policy measures.
The upside for bond yields remains limited, however, given the risks stemming from a slowdown in emerging markets and potentially looser monetary policy, analysts said.
"As the ECB minutes yesterday reminded us, the central bank remains tilted towards further easing measures, which leaves bond yields with more downside potential," said Jan von Gerich, chief strategist at Nordea.
Stock markets were up across Europe, reflecting the increased risk appetite.
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