LONDON: Euro zone government bonds lost some of their allure on Thursday as talk of the Bank of Japan's exit from unprecedented monetary easing set the stage for similar signals from the European Central Bank.
Yields - which move inversely to prices - nudged off multi-week lows as a meeting of the bloc's monetary guardians shifted the focus away from geopolitical events that have seen investors stock up on safe-haven bonds in recent days.
While some cautious tightening from the ECB had long been a fixture in the diary, a discussion by a BOJ policymaker about withdrawing monetary stimulus took some investors by surprise as it is still seen toiling with stubbornly low inflation.
"The reason we are a bit under pressure today is because from a number of angles being long (bonds) doesn't look that compelling anymore," RBC's global macro strategist Peter Schaffrik said. "Whether that extends into a more prolonged sell-off, we'll have to see."
German 10-year government bond yields, the bloc's benchmark, edged up 3 basis points to 0.28 percent, moving away from a six-week low of 0.245 percent hit Wednesday.
Most other euro zone equivalents were 2-3 bps higher on the day.
While the ECB is widely expected to keep policy unchanged on Thursday, including its 2.3 trillion euro ($2.59 trillion) bond-buying programme and sub-zero interest rates, sources told Reuters it will acknowledge the improved economic outlook by removing a reference to "downside risks" in its statement.
RBC is also expecting subtle changes to its forward guidance to remove a reference to possible further cuts to interest rates.
But any announcement on its quantitative easing (QE) programme is likely to be put off until the autumn, when policymakers hope the economic picture will have become clearer.
Aside from the focus on monetary policy, analysts said there was broad relief across financial markets after former FBI director James Comey's testimony on the bureau's investigation into Russia's alleged interference in the 2016 U.S. presidential election revealed little in the way of new details.
Investors have viewed this saga as a distraction for President Donald Trump who they are pinning hopes on to reflate the world's biggest economy with ambitious spending plans.
Italian government bonds bucked the broader trend, finding demand after a report that Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca.
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