Euro zone government bond yields edged up on Wednesday, tracking weakness in the UK gilts market after the Bank of England governor gave pension funds and other investors three days to fix their problems before it withdraws support.
The BoE has introduced an emergency bond-buying programme in response to a surge in borrowing costs following a package of unfunded tax cuts unveiled by the UK government last month.
The programme runs until Friday. Governor Andrew Bailey said on Tuesday that it would not run beyond then, though the Financial Times later quoted three sources as saying the BoE had privately indicated that the buybacks could be extended.
Although the issues affecting the UK bond market are largely domestic, there has been a spillover into other debt. U.S. Treasuries, which were trading when Bailey spoke in Washington, took the brunt of the hit, rising towards multi-year highs, which in turn weighed on the euro zone market in early trade.
"Bunds opened a bit higher this morning, which I think was reflecting what we saw with Treasuries, if anything, because of the timing of Bailey's comments - Treasuries ended up taking the hit in the first instance," Standard Chartered head of G10 rates strategy John Davies said.
Gilts opened under pressure, but with the central bank backstop still in place, losses were more contained than in previous sessions. "I would say that the fact that, within the uptick in Bund yields today, you see it by a steeper curve, with the short end not doing too much and, I guess that, while it's not something that is changing the euro area, or European Central Bank policy, outlook, it is changing the relative pricing of longer-term yields," he said.
Two-year Schatz yields were unchanged on the day around 1.832%, while yields on the 10-year Bund , which serves as the regional benchmark, edged up 3 basis points to 2.336%. The yield hit an 11-year high above 2.36% on Tuesday.
Ten-year Italian BTP yields , which act as a yardstick for the health of the euro zone's more indebted members, were unchanged at 4.69%.
With little in the way of market-moving economic data, euro zone debt investors will keep their focus on U.S. inflation readings this week that are likely to cement expectations for more chunky interest rate rises from the Federal Reserve.
Final inflation data is due on Thursday from Germany, but before that, investors will be able to parse through the minutes of the Federal Open Market Committee's most recent meeting later on Wednesday.
"Though three weeks out of date, the minutes should strike a relatively hawkish tone, laying the groundwork for a fourth straight 75bps hike next month. However, tomorrow lunchtime’s CPI print is likely to be a much greater risk event for the market," CaxtonFX market strategist Michael Brown said.
