German 30-year yields rise for fourth day amid Japan bonds volatility, geopolitics

By Sophie Kiderlin

LONDON, Jan 21 (Reuters) - Long-dated German bond yields rose for the fourth session in a row on Wednesday as investors continued to digest both the implications of this week's heavy selloff in Japanese debt for global markets, and the ever changing geopolitical environment.

German 30-year yields were last up nearly 3 basis points to 3.51%, reversing an earlier decline. They are already up 10 bps this week which, if sustained, would be the largest weekly rise since early December. DE30YT=RR

A selloff in Japanese bonds on Tuesday drove long-dated yields there up by the most in a day since 2003 and the turbulence spread to other debt markets, including the euro zone. JP/

But things were calmer in Japan on Wednesday, and while German yields rose again, they remained below Tuesday's intraday highs.

"I think the market is digesting a little bit what happened in Japan. Plus, it's certainly in wait-and-see mode before we have more headlines coming from Davos," said Anne Beaudu, deputy head of global aggregate strategies and global fixed income portfolio manager at Amundi.

The World Economic Forum has already generated many headlines. U.S. President Donald Trump on Wednesday, ruled out the use of force in his bid to control Greenland, but said in a speech in Davos that no other country can secure the Danish territory.

But his wide ranging speech largely left euro zone bond markets unmoved.

German 10-year yields, the benchmark for the euro zone, were last nearly 2 bps higher at 2.88% DET0YR=RR.

"Since the beginning of the year, it's very much about geopolitics," Beaudu said, referencing Trump's external policies. These have implications for Europe and raise questions about how its leaders could react, she added, noting that further developments are expected in the coming days.

The European Parliament on Wednesday, decided to suspend its work on the European Union's trade deal with the United States in protest at Donald Trump's demands to acquire Greenland and threats of tariffs on European allies who oppose his plan.

Tim Graf, head of macro strategy for EMEA at State Street Markets, said the standoff over Greenland added to market pressure triggered by Japanese bond yield moves earlier in the week.

"But now, today, you get this sort of cooling of market tensions, and especially the JGB market is starting to find some equilibrium," he said.

During Wednesday's session, Japanese bond yields fell sharply, reversing some of Tuesday's jump, with investors taking a dim view of Japanese politicians in pre-election mode and jostling to offer tax cuts in an economy with the heaviest debt burden in the developed world.

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.

Some investors can often use such selloffs as a point at which to snap up bonds that they believe will regain value.

Shorter-dated rate sensitive yields were steady with Germany's two year yield flat at 2.08%.

Euro zone countries also kept up the pace of what's been a busy period for sales of new bonds, though these have had little impact on secondary market prices.

"There has been a lot of issuance since the beginning of the year. It's continuing. It has been very well absorbed by the market and I don't see any sign of stress on this today," Beaudu said.

Germany on Wednesday sold 30-year bonds for an average yield of 3.49%, higher than the 3.45% achieved in a sale earlier this month. But demand was up, with a bid-to-cover ratio of 2.4 compared with the previous 2.1.

France's 10-year yield was steady at 3.53% after domestic tensions over the country's budget appeared to ease earlier in the week.