Germany's benchmark 10-year Bund yield climbed further into positive territory on Monday, hitting its highest level since June's Brexit result as a shake-out in world bond markets made itself felt across the region.
Disappointment at the European Central Bank's inaction at last week's policy meeting, jitters over whether the Federal Reserve will raise interest rates in September and talk that the Bank of Japan is studying ways to steepen the bond yield curve have conspired to unsettle sovereign bond markets.
The sell-off, that started towards the end of last week, has injected a new dose of volatility into global markets and revived memories of the brutal bond sell-off or "Bund tantrum" that gripped the safe-haven German market last year.
"There is an injection of uncertainty over whether monetary policymakers are at a turning point," said Mizuho rates strategist Pater Chatwell. "We have to price in approximately three months of uncertainty."
The 10-year Bund yield climbed almost 5 basis points on Monday to a high of 0.059 percent.
It has jumped more than 15 bps in the last three sessions, ending a period of trading in negative territory that followed Britain's June 23 vote in favour of leaving the European Union.
In price terms, 10-year Bunds have shed almost 2 percent over the past three sessions.
The sell-off in German bonds has also taken yields on seven-year bonds back above minus 0.40 percent, increasing the pool of eligible bonds for the ECB's bond-buying programme.
Lower-rated southern European bonds also came under pressure as a pull-back in risk appetite triggered the biggest drop in European shares in almost three months.
Portugal's 10-year bond yield jumped 10 bps to a two-month high at almost 3.28 percent, before pulling back slightly.
Italian and Spanish yields rose to multi-week highs, while other euro zone bond yields were 2-3 bps higher on the day.
Outside the bloc, fixed income markets were also in the doldrums.
US 10-year Treasury yields hovered at their highest levels in more than two months, while the Japanese yield curve steepened sharply on speculation that the Bank of Japan will change its policy.
The effectiveness of central bank policy is once again in the spotlight, with the ECB's decision to leave monetary policy unchanged last week seen highlighting a lack of ammunition available to stimulate inflation and growth in the euro area.
Following last Thursday's meeting, ECB chief Mario Draghi said an extension of the 1.7 trillion euro asset-purchase programme had not been discussed. He added that the ECB was considering various options to ensure the smooth running of assets that it buys.
Rabobank said that although the acknowledgement that the ECB had not discussed expanding its bond-buying programme was surrounded by dovish comments, "Draghi's remark was taken by some as a hint that the central bank may be having doubts about impact of its bond buying scheme".
And as euro zone yields rose for a third straight session, parallels were also drawn with other episodes of bond market volatility such as a sell-off in German bond markets between April and June last year that caught many investors off guard.
"It's almost akin to the "taper tantrum" or the "Bund tantrum" but on smaller scale thus far," said Patrick O'Donnell, investment manager at Aberdeen Asset Management. "But the macro backdrop is weakening which means there's still going to be a demand for relatively safe assets."
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