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Euro zone yields edge up a whisker, traders watching Japan

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LONDON — Euro zone bond yields inched up on Tuesday, rising from month lows hit late last week, but trading in bonds globally was cautious ahead of the result of the closely-watched Bank of Japan meeting due Wednesday.

Germany’s 10-year bond yield, the benchmark for the bloc, was little changed at 2.191%, up from a one-month low of 2.063% hit Thursday.

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Italy’s 10-year yield, the benchmark for the European periphery, was 3 basis points (bps) higher at 4.046%, up from its one month low of 3.871% hit Friday.

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Bond yields have been dropping in recent weeks after data showing inlfation is slowing in both Europe and the United States and that economic conditions are not proving as bad as feared, though they have consolidated a little as policy makers continue to point to the need for monetary tightening.

ECB chief economist Philip Lane told the Financial Times in a story published Tuesday the European Central Bank must raise interest rates to a level that starts to restrict growth and their peak will depend on how the economy responds to the most rapid policy tightening cycle on record.

Germany’s ZEW survey will offer a guide to the latest sentiment in the currency bloc’s largest economy on Tuesday, and lower energy prices mean analysts expect it should point to an improved economic picture.

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The big event globally however is in Japan, where the central bank on Tuesday began what should be a two-day meeting alongside a cacophony of market bets the Bank of Japan could make further tweaks to its policy of yield curve control, or make even more dramatic moves.

Japanese 10-year government bond yields topped the Bank of Japan’s (BOJ) policy ceiling for a third straight session on Tuesday.

“Fixed income markets in developed countries are usually very connected. If the BOJ surprises markets in either direction we could also see some effects on European government bonds, as seen in December,” said Francesco Maria Di Bella, fixed-income strategist at UniCredit.

“With a light weekly data calendar in the eurozone, investor focus on the upcoming BOJ meeting might be higher than usual.”

The BOJ raised its effective cap on the 10-year Japanese government bond yield to 0.5% at its December meeting.

Back in Europe, Germany’s 2 year yield was 1 bp higher at 2.584% and Italy’s was up a similar amount at 3.014%.

Britain’s benchmark 10-year yield was at 3.433%, up 5 bps after data showed pay growth picked up pace in the three months to November. (Reporting by Alun John and Harry Robertson, Editing by Angus MacSwan)

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