Government bond yields continued their upward trend this week, with the Bank of Japan’s move to end its ultra-accommodative monetary policy and some stronger than expected US employment data adding extra impetus ahead of the weekend.

The yield on Japanese government five-year and 10-year bonds leapt on Friday, as investors began to detect hawkishness in the Bank of Japan’s new monetary policy regime.

Yields had fallen on Thursday, after the Bank of Japan announced the end of quantitative easing, the policy that has seen it flood the markets with liquidity in order to keep interest rates at zero.

Analysts said this fall was due to the unwinding of bearish bond positions.

But on Friday there was a re-think.

The yield on the benchmark 10-year yield rose 5bp to 1.655 per cent, which was about 3.5bp higher than last Friday’s close and puts the yield at its highest since mid-2004.

In the US, 10-year Treasury bond yields touched their highest level in 21 months earlier in the week, while the curve began to resume a normal shape after more than two months of inversion.

On Friday, 3-month paper was yielding 4.602 per cent – less than any other point in the curve, out to 30 years.

However, the shape of the curve still suggests a high degree of nervousness both about the immediate intentions of the Federal Reserve – where many now think that an end to monetary tightening may not come quite as early as hoped –
and about the state of the economy.

Three-year bonds are now yielding more than 4.81 per cent and that is more than the 10-year.

Eurozone bonds continued their price slide as yields rose in expectations of at least two further interest rate hikes to come this year from the European Central Bank. The sell-off saw yields on the 10-year bund 5.8bp higher on the day and 10.1bp up on the week to 3.687 per cent.

In the UK, hopes of any further interest rate cuts this year were diminishing, which led investors to sell gilts and saw yields rising strongly for a second week, with 10-year yields up by the most over a fortnight in almost a year.

The 10-year gilt yield was 1.5bp higher on Friday at 4.331 per cent, leaving it more than 16bp higher over the past two weeks.

Two-year yields have risen 12bp over the same period to 4.420 per cent on Friday.

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