By Dhara Ranasinghe and John Geddie
LONDON Oct 6 Europe's benchmark German bond
yield edged briefly back above zero on Thursday, reversing
earlier falls, as a sell-off in the British government bond
market spilled over into the euro area.
Britain's 10-year gilt yield jumped almost 10 basis points
to a three-week high, with analysts citing
concerns about a shift away from monetary policy to fiscal
policy to support economic growth as a trigger for the move.
Data pointing to strength in the U.S. jobs market a day
before the release of the non-farm payrolls report also weighed
on global bond markets - U.S. Treasury yields also hit
But the sell-off was most significant in the gilt market,
where investors sense a shift in focus for policymakers.
Finance minister Philip Hammond will set out next month how
Britain will try to rely less on ultra-low interest rates that
have hurt savers, and focus more on other ways to boost growth,
an adviser to Prime Minister Theresa May said.
May took the unusual step of commenting on central bank
policy on Wednesday when she said near-zero rates and the Bank
of England's huge bond-buying programme had hurt savers.
"The BoE is meant to be independent. As soon as politicians
threaten that independence the cost of borrowing will rise and
the exchange rate will fall," David Blanchflower, professor of
economics at Dartmouth College in New Hampshire and a former
Bank of England policymaker, told Reuters.
Germany's 10-year bond yield rose as high as 0.008 percent
before retreating to just below zero.
"There is a growing feeling about a shift away from monetary
policy to fiscal policy in the UK," said Orlando Green, European
fixed income strategist at Credit Agricole.
European Central Bank chief economist Peter Praet,
meanwhile, said the ECB needed to watch the side effects of its
ultra-easy monetary policy.
Euro zone yields, including the bloc's top-rated German debt
- usually seen as a safe haven in times of stress - have shot
higher this week after reports that the ECB might scale back its
quantitative easing scheme.
Despite a spokesman for the ECB saying the central bank had
not discussed such 'tapering', the mere mention of the word has
rattled markets already questioning whether central banks can
win the battle to boost growth and inflation.
Minutes from the ECB's last meeting helped soothe the
concerns, allowing euro zone bonds a brief respite from selling.
ECB rate-setters agreed the euro zone economy needed
continued monetary support when they met in September, noting
underlying price growth showed no sign of recovery, the minutes
"The market did need some confirmation that the next step
will be more easing and we can see hints of that in these
minutes," said Cyril Regnat, fixed income strategist at Natixis.
French and Spanish bond auctions eased upward pressure on
yields. France sold about 7.5 billion euros of long-term debt,
including a 50-year bond, while Spain sold 4.8 billion euros.
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Dhara Ranasinghe; Additional reporting by Jamie
McGeever; Editing by Hugh Lawson)