LONDON: Euro zone government bond yields fell on Thursday, pulling away from multi-month highs after the Bank of Japan fired a warning shot to markets not to push borrowing costs too high following Donald Trump's unexpected win last week in the U.S. election.
The BOJ offered on Thursday to buy unlimited bonds for the first time under a revamped policy framework and its governor, Haruhiko Kuroda, said the central bank would not stand idly by as Japanese government bond (JGB) yields jump in line with moves in U.S. Treasuries.
The BOJ's decision serves notice to the markets that it is closely monitoring developments as it tries to keep borrowing costs low to spur stubbornly low inflation. In the euro zone, the European Central Bank also has a massive bond-buying programme in place to help spur growth and inflation.
"The BOJ's move shows that there is a bit more of an effort to cap yields and knowing that, other bond markets can be more stable from here," said Mizuho strategist Peter Chatwell.
The BOJ offered to buy an unlimited amount of bonds at minus 0.04 percent in five-year Japanese government bonds(JGB)and minus 0.09 percent in the two-year paper, employing a method the bank unveiled in September when it set an explicit target of "around zero percent" for the 10-year yield.
As JGB yields fell following the BOJ move, borrowing costs in the euro zone followed suit.
Germany's benchmark 10-year Bund yield fell almost 5 basis points to 0.26 percent, moving away from a peak of 0.396 percent hit on Monday -- the highest level since late January.
Other euro zone yields were 2-5 bps lower on the day, pulling back from multi-month highs as the BOJ's bond buying brought relief to a market battered by expectations that the economic policies of U.S. President-elect Trump will fuel inflation.
U.S. Treasury prices were also firmer on Thursday, with 10-year yields down 3 bps at 2.18 percent.
A test of sentiment towards euro zone bond markets comes later in the day, with both Spain and France scheduled to sell government bonds.
Spain sells three, five and 10-year bonds, while France auctions a new five-year bond.
European Central Bank President Mario Draghi is due to speak at an event in Frankfurt on Friday and may be pressed about his views on the recent surge in bond yields, analysts said.
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