Eurozone government bond yields rose on Monday (Sep 11) after Japan’s 10-year bond yield hit its highest level in more than nine years and as traders looked towards the European Central Bank’s (ECB) interest rate decision later in the week.

Germany’s 10-year bond yield, the benchmark for the single-currency bloc, rose 4 basis points (bps) to 2.633 per cent, after climbing 5 bps the previous week. Yields move inversely to prices.

“Basically it’s the BOJ (Bank of Japan) that’s driving our open today,” said Pooja Kumra, European rates strategist at lender TD.

The yield on Japan’s 10-year government bond jumped 6 bps to 0.705 per cent, its highest since January 2014, after governor Kazuo Ueda said the BOJ could have enough data by year-end to determine whether it can end the era of negative interest rates.

Peter Schaffrik, chief European macro strategist at RBC Capital Markets, said the rise in Japanese yields was likely pushing up their eurozone peers. “There is nothing on the agenda in terms of data,” he said.

Japanese investors are major holders of foreign bonds, thanks in large part to years of ultra-low interest rates at home. Some analysts are concerned that a rise in Japanese rates could draw money back to Japan and out of European bond markets.

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Italy’s 10-year bond yield, seen as the benchmark for the eurozone’s more indebted countries, was 5 bps higher at 4.386 per cent on Monday.

Investors were also looking ahead to Thursday’s finely poised ECB interest rate decision. Pricing in derivatives markets indicated that traders see a 62 per cent chance that the ECB will leave interest rates at 3.75 per cent; and a 38 per cent chance of a 25 bp increase.

Price pressures in the eurozone remain strong, with headline inflation running at 5.3 per cent in August, but the bloc’s economy is weakening, particularly in Germany.

The European Commission on Monday said the bloc’s economy will grow 0.8 per cent in 2023, a downgrade from May’s forecast for 1.1 per cent growth.

The yield on Germany’s two-year government bond, which is highly sensitive to interest rate expectations, was last up 2 bps at 3.087 per cent.

“We expect a hawkish pause from the ECB this week,” said Mohit Kumar, chief European economist at Jefferies. “We expect ECB to keep rates on hold but keep the door wide open for another hike in coming meetings.”

Also on the economic calendar this week is US inflation data on Wednesday, which will feed into the Federal Reserve’s interest rate decision on Sep 20.

British wage growth figures are due on Tuesday, ahead of a Bank of England decision on Sep 21.

The gap between German and Italian 10-year borrowing costs, seen as an indicator of investor confidence in the eurozone’s periphery countries, widened 1 bp on Monday to 174 bps. Reuters