LONDON: Germany's 10-year bond yield on Wednesday hit its highest level since the European Central Bank in October extended and cut its bond buying scheme, as central bank speculation and heavy new debt supply across the euro zone knocked investor sentiment.
A combination of factors has pushed yields higher in recent days, with global growth and higher oil prices making investors speculate that central banks globally will tighten policy.
Some investors saw a Bank of Japan reduction of bond purchases this week as a potential early signal of this.
US 10-year Treasury yields, pushed up on Tuesday by the BoJ news, hit fresh 10-month highs around 2.59 percent on Wednesday after a Bloomberg report that Chinese officials are recommending lower US government bond purchases.
"Watching the BOJ is quite important because if they start to move on that, that's your last major central bank liquidity provider disappearing. That would have an impact on Europe and one of the ways that would happen is you would see yield curves steepen," said David Zahn, Franklin Templeton's head of European fixed income.
The yield on Germany's 10-year government bond , the benchmark for the bloc, was 2 bps higher at one stage at 0.48 percent.
In Europe, indicators have pointed towards a strong economic performance in 2018, which in turn puts pressure on the European Central Bank to withdraw extraordinary stimulus - due to run til September at least - sooner rather than later.
Though inflation is still well below the ECB's target, some suggest this could change soon.
Investors are also keeping an eye on a wage dispute in Germany: the country's biggest union is demanding an inflation-busting 6 percent pay hike this year for about 3.9 million workers that could give a boost to consumer prices across the bloc.
A sharp rise in oil prices in recent times could also push inflation higher worldwide: US crude prices on Wednesday touched their highest since December 2014.
Other analysts pointed to a spike in supply as another cause for rising yields.
"Italy and Portugal announced syndications overnight and many financials are hitting the screens as well so many international investors are shifting their portfolios to make room for this supply," said DZ Bank analyst Pascal Segesser.
Italy generated over 26 billion euros of demand for a 20-year bond sale on Wednesday while Portugal received over 17 billion euros of orders for a 10-year bond syndication.
In addition, Germany sold just over 4 billion euros of 10-year bonds in an auction, short of its 5 billion euro target.
The rise in yields is prompting speculation among investors as to whether this is the start of a sustained bear market for bonds.
"We have had some strong growth numbers at the start of the year and there's some questions on whether the central banks will finally change their stance," said DZ Bank's Segesser.
Investors will look for further hints on the monetary policy outlook when US policymakers Charles Evans, Robert Kaplan and James Bullard speak later in the day.
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