LONDON: Euro zone government bonds fell across the board on Tuesday as investors fretted that central bank stimulus that has buoyed financial markets this year might not be as abundant in future.
Lower-rated euro zone debt underperformed German Bunds after the Bank of Japan announced no new measures to stem bond market volatility, further unsettling investors who have been worried about the outlook for the US Federal Reserve's bond purchases.
Investors were also wary of adding to their exposure to higher-yielding bonds as Germany's Constitutional Court started a two-day hearing on the legality of the European Central Bank's bond-buying scheme that has defused the euro zone debt crisis.
The head of the court said the scheme's success would have no impact on whether it was constitutional. A final ruling is not expected until after German national elections in September.
The market's main focus was on weaker Japanese equities after the OJ disappointed some investors who had expected the central bank to extend the duration of cheap fixed-rate funds to calm volatility in Japanese Government Bonds.
The BOJ decision came days after the ECB kept interest rates at a record low 0.50 percent and shelved fresh policy measures.
"The market is disappointed that the BOJ didn't take any measures. Once again it's the fact that people are seeing less available liquidity in the market over the coming months," BNP Paribas strategist Patrick Jacq said.
"The fact that the market is no longer discounting any further rate cut in the euro zone is adding to stress on liquidity. This is why peripherals are being hammered and even core markets are suffering from this."
Greek bonds were the euro zone's worst performers, with 10-year yields jumping almost a point to their highest since early May, around 10.63 percent.
Athens's failure to attract any bids for state-run gas firm DEPA, making it likely that bailed-out Greece will miss a binding target to raise at least 1.8 billion euros from privatisation by end-September, exacerbated the sell-off.
FRAGILE MARKETS
Yields on debt issued by Ireland and Portugal, two other euro zone strugglers who have also been bailed out, spiked to their highest since early February and mid-April respectively.
Spanish 10-year yields were up 17 bps at 4.75 percent and 4.45 percent respectively, with moves in the latter compounded by the prospect of debt sales on Thursday.
"There's just an overhang of this stuff (peripheral euro zone bonds) and people are offloading some of it. And maybe at the margin there are nerves about this OMT (ECB bond purchase scheme) hearing. It's all very fragile," a trader said.
The German Bund future was last down 51 ticks to 142.33, taking it to its lowest level since early March. German 10-year yields were 4 bps higher at 1.59 percent.
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