* Bund yields hit highest level since Brexit result
* Shake-out grips world bond markets, volatility back
* Portuguese bond yields jump as much as 10 bps to two-month
* ECB inaction, Fed jitters, BOJ policy speculation all
(Updates prices for close)
By Dhara Ranasinghe
LONDON, Sept 12 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 closed up 3 basis points on Monday at
0.04 percent, just off a high of 0.059 percent
after a brace of Fed policymakers said there was no urgency over
a rate hike that some investors fear may be imminent.
Bund yields have jumped around 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
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
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.
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Portugal's 10-year bond yield jumped 10 bps to a two-month
high at almost 3.28 percent, before pulling back
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
U.S. 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."
(Reporting by Dhara Ranasinghe; Editing by Toby Chopra)