European bonds weaker as investors lock in profits

European government bonds were weaker on Monday as some investors locked in profits following last week’s rally.

However, trading volumes were lighter than usual with the US market closed for a holiday and the absence of data releases.

Investors instead looked ahead to economic figures due later in the week, including US inflation data and Germany’s Ifo index of business sentiment. The minutes from the last rate-setting meeting from the Bank of England will also be in focus.

As prices fell in late trading, the yield on the two-year Schatz rose 1.8 basis points to 3.966 per cent and the yield on the 10-year Bund added 2.1bp to 4.068 per cent. The yield on the two-year UK gilt was up 2.9bp to 5.377 per cent while the 10-year gilt was yielding 4.896 per cent, 1.7bp higher.

John Wraith, analyst at Royal Bank of Scotland, said: “Yields have continued the gentle drift to higher ground that began on Friday morning in a modest correction to the recent improved tone, but there is no urgency behind the move.”

Prices rose and yields fell on Japanese government bonds, after the Nikkei inched up to a new six-year closing high. The 10-year yield rose 1.5bp to 1.725 per cent. But traders were reluctant to let yields rise too far before the Bank of Japan’s interest rate decision on Wednesday.

The BoJ’s decision is crucial for global asset markets. Ultra-low Japanese interest rates provide cheap financing for “carry trades”, where hedge funds borrow in yen and invest in higher yielding assets elsewhere.

Japan’s key interest rate – the overnight call rate – stands at just 0.25 per cent.

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