Euro zone yield curves steepen as geopolitics weighs, Japanese selloff spills over

By Alun John

LONDON, Jan 20 (Reuters) - Euro zone yield curves steepened on Tuesday as longer dated bonds sold off, and shorter dated ones rose marginally as investors processed both swirling geopolitics and tumbling Japanese government bond prices.

Germany's 10-year yield, the benchmark for the euro zone, rose 3 basis points to 2.86%. DE10YT=RR

But super long 30-year yields rose 5 basis points to 3.51% DE30YT=RR while short dated two-year yields were slightly lower at 2.08%.

Bond yields move inversely to prices, and yield curves are said to steepen when longer dated yields rise relative to shorter dated yields.

Longer dated bond yields often rise when investors require a greater premium to hold debt for a longer period of time, sometimes due to global uncertainty, or expectations of greater borrowing in the future.

Traders and policy makers are still trying to process the implications of U.S. President Donald Trump's repeated wish for the U.S. to control Greenland, his threat to impose tariffs on several European countries if a deal is not reached and what the European response will be.

Thirty-year U.S. Treasury yields rose 7 basis points on Tuesday to 4.91%, their highest since September. US30YT=RR US/

Shorter dated yields are closely linked to central bank rate expectations, and while the European Central Bank looks to keep rates firmly on hold in the coming months, the uncertainty would make them less likely to raise rates any time soon and could make a further rate cut marginally more likely.

And several outcomes to the Greenland spat could drive curves steeper, said analysts at Mizuho.

If there is no agreement over Greenland, "EU growth gets hit due to tariffs, which all else equal points to a more dovish ECB (and) more fiscal spending to finance defence in long term (therefore) steepening of curve," they wrote in a note.

"If a deal is done, expect higher U.S. issuance - to pay for Greenland - and further curve-steepening pressure."

There were also spillovers from turmoil at the long end of the Japanese government bond market, where Prime Minister Sanae Takaichi's calling of a snap election has shaken confidence in the country's fiscal health.

Yields on 20-year JGBs JP20YTN=JBTC soared as much as 19.5 basis points (bps), the steepest one-day move since last April, to an unprecedented 3.45% as demand for the notes slumped at an auction.

French yields were moving in line with German, with the 10- year yield up 3 bps at 3.53%. FR10YT=RR

French debt outperformed on Monday after Prime Minister Sebastien Lecornu said he would use special constitutional powers to force a budget for 2026 through parliament, after winning enough political backing for the bill to survive the inevitable no-confidence vote that would follow.