German long-dated yields edge down after Japanese debt meltdown

By Sophie Kiderlin

LONDON, Jan 21 (Reuters) - Long-dated German bond yields inched lower on Wednesday, but still headed for their largest weekly rise in a month, after a selloff in Japanese government debt the previous day ignited a rout in global fixed income.

German 10-year yields, the benchmark for the euro zone, were last around 1 basis point lower at 2.8443% DET0YR=RR.

Longer 30-year yields were also down 1 bp at 3.473%, but still headed for a 4.7-bp rise this week, their largest since the start of the year, as prices have fallen.

A selloff in Japanese bonds had triggered global yields to spike this week, as a looming snap election raised renewed concerns about Japan’s fiscal outlook.

ING analysts said the German bond yield moves and market pricing relating to upcoming European Central Bank interest rate decisions suggested that the macro picture in the euro zone has not changed much, with Japanese bond volatility driving bond pricing, rather than European-centric factors.

Markets have been roiled by geopolitical tensions this week, including U.S. President Donald Trump’s desire to control Greenland which is facing pushback from European leaders and has triggered renewed threats of tariffs.

“The back end of the euro curve is being driven by global spillovers, but the front end remains remarkably stable,” they said.

But they noted that fiscal concerns are a global issue.

“As government spending concerns keep playing across the world, the path of least resistance is still for steeper curves. Japan is not the only country facing fiscal challenges and as global rates rise, budget deficits will only be strained further.”

Longer-dated bond yields can rise at times of global uncertainty or when expectations for future borrowing increase as investors then require a larger risk premium.

During Wednesday’s session, Japanese bond yields fell sharply, reversing some of Tuesday’s jump.

Such uncertainty could impact ECB decision making in the coming months, with the central bank being less likely to raise interest rates and slightly more inclined to cut them further due to the uncertainty.

Broadly, the ECB is expected to keep rates steady for now.