Germany’s benchmark 10-year bond yield rose on Monday, holding above zero percent with the market’s focus fixed on central bank meetings in Washington and Tokyo this week.
The Federal Reserve, which meets on Wednesday, could give a clear signal of an interest rate rise to come even if it follows market expectations for a pause this month.
Data on Friday showing U.S. consumer prices rose more than anticipated in August raised the odds of the Fed boosting rates later this year, pushing U.S. Treasury yields higher on Friday.
The Bank of Japan, which concludes a two-day session on Wednesday, is seen in particular as a source of volatility.
It could shift negative interest rates to the primary focus of its monetary policy, heightening market disquiet over what any move away from quantitative easing reveals about the waning firepower of global central banks.
With three years of massive money printing failing to push up inflation, the BOJ is expected to move away from shock therapy and towards a protracted battle against deflation, according to sources familiar with its thinking.
Analysts said that what the BOJ says and does could have ramifications for euro zone bond markets since the European Central Bank is in the midst of its own QE programme and there are concerns its policy options are also narrowing.
“QE has always been a tool to push down bond yields and now the BOJ is suggesting it could move away from this,” said David Schnautz, an interest rate strategist at Commerzbank.
“This has made markets in Europe wary because what the BOJ does could be relevant to the ECB.”
The 10-year German Bund yield rose 1.5 basis points to 0.017 percent, having briefly dipped into negative territory earlier in the session.
Disappointment with a lack of action at an ECB meeting earlier this month has put upward pressure on euro zone bond yields and fuelled a perception that major central banks are running out of tools to boost growth and inflation.
News that German Chancellor Angela Merkel’s Christian Democrats suffered a rout in a Berlin state election at the weekend had little immediate market impact.
Still, analysts said they were watching for fallout from the results as this could affect national elections in Germany next year and also the country’s negotiating stance with Britain, which voted in June to leave the European Union.
“We continue to see a trend of voters shifting away from the big centrist parties in Europe and that is interesting in terms of what it means for German national elections next year,” said DZ Bank strategist Christian Lenk.
Most other euro zone bond yields were about 1 bps higher. A recovery in risk appetite and a rally in European shares helped push peripheral bond yields lower, with 10-year Portuguese bond yields pulling back from 2-1/2 month highs touched on Friday .
Belgium sold 3.5 billion euros ($3.9 billion) of medium- and long-term debt at an auction, with yields on its benchmark 10-year bond rising slightly from a record low set in July.