LONDON: Europe's benchmark bond yield held near a one-month high on Tuesday after an inflation-boosting rise in oil prices coincided with more hints that central bankers were stepping back from the aggressive monetary easing stance of recent years.
German 10-year yields fell slightly on the day, but were still near Monday's peak, as other bond benchmarks in the United States and Japan hit four-month and three-week highs, respectively.
Brent crude struck a one-year high on Monday after Russia said it was ready to join a group of oil producers planning to curb oil output.
This signals a potential boost to inflation that would take the heat off central banks struggling to lift consumer prices with ultra-low rates and bond-buying purchase programmes.
After a recent Bloomberg report that a consensus is growing among European Central Bank policymakers to eventually scale back or "taper" purchases, Governing Council member Ignazio Visco said on Monday that any exit would largely depend on economic data.
Meanwhile, Bank of Japan Governor Haruhiko Kuroda said on Sunday that its bond buying could be reduced considerably under a new framework adopted last month, while the US Federal Reserve is broadly expected to raise rates for just the second time in a decade later this year.
"The bearish trend is your friend," wrote Societe Generale strategists in a note on Tuesday. "Concerns about central banks turning the corner are growing and hurting bonds.
The rise in oil prices only added to the bond misery." German 10-year bond yields were down 2.3 basis points (bps) to 0.03 percent on Tuesday, finally putting to an end a steady rise in the yield since the end of September.
A key market measure of long-term inflation expectations in the euro zone - the five-year, five-year breakeven forward rate - is at its highest level since June.
Japanese yields earlier climbed 2 bps to hit minus 0.05 percent for the first time since Sept. 23, while US equivalents climbed 4 bps to hit 1.77 percent, the highest since June 3.
The dollar hit an 11-week high against a basket of other major currencies, as money market prices suggested a 70 percent chance the Federal Reserve will hike interest rates at its Dec. 13-14 meeting, according to CME Group's FedWatch tool.
On the data front, a ZEW survey of investor sentiment showed the mood among German analysts and investors improved more than expected in October, suggesting traders are more upbeat about the growth prospects of Europe's biggest economy.
Commerzbank had expected Bund yields to rise on the back of this, but in fact yields fell on Tuesday.
"It's an encouraging sign that despite the better than expected outcome the sell-off in Bunds (of recent weeks) hasn't continued," said Commerzbank analyst David Schnautz.
"The fourth quarter (of the year) has been rough on Bunds, so maybe it will hold at these levels. But we are still in the early stages," he said.
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