European yields edge higher as markets digest BoJ policy shock

Global bond markets steadied on Wednesday following a heavy sell-off sparked by the Bank of Japan’s surprise decision to relax its policy of pinning yields close to zero.

US 10-year Treasury yields edged 0.01 percentage points higher to 3.69 per cent, having earlier touched a three-week high of 3.71 per cent. German and UK bond yields were also marginally higher, adding to Tuesday’s sharp rise.

Bond markets had been rocked by the BoJ’s announcement that it would allow 10-year Japanese yields to climb as high as 0.5 per cent, compared with 0.25 per cent previously. While governor Haruhiko Kuroda stressed that the move was not a shift away from Japan’s ultra-loose monetary policy, investors sensed a crack in the BoJ’s resolve to stand apart from the global dash to higher interest rates.

“The BoJ has taken a first step toward tighter monetary policy,” said Ulrich Leuchtmann, currency strategist at Commerzbank.

The yen was little changed on Wednesday at 131.7 to the dollar, following a rise of nearly 4 per cent on Tuesday.

The BoJ’s decision came after US Federal Reserve chair Jay Powell said there was “more work to do” in taming US inflation after lifting interest rates last week, while Christine Lagarde, president of the European Central Bank, said it was “not done” raising rates.

“The Fed, ECB and BoJ have all delivered hawkish surprises over the past week,” said Steve Englander, head of G10 FX research at Standard Chartered, adding that recent moves by the world’s most influential central banks had added a “risk-off flavour” to markets heading into the Christmas period.

European stocks made early gains, helped by the return of calm to bond markets, with the region-wide Stoxx 600 gaining 0.73 per cent. The UK’s FTSE 100 was up 0.39 per cent, while France’s CAC 40 and Germany’s Dax climbed 0.77 per cent and 0.72 per cent, respectively.

On Wall Street, futures contracts tied to the S&P 500 and the tech-heavy Nasdaq pointed to 0.7 per cent gains at Wednesday’s open for both indices.

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