EURO GOVT-Global monetary stimulus fears hit euro zone bonds
* Euro zone bonds fall across the board, periphery hardest hit
* Bank of Japan refrains from measures to reduce volatility
* German court hearing over ECB bond scheme jangles nerves
By Ana Nicolaci da Costa and Emelia Sithole-Matarise
LONDON, June 11 (Reuters) - Euro zone government bonds fell across the board on Tuesday as investors fretted that central bank stimulus that has buoyed financial markets this year might not be as abundant in future.
Lower-rated euro zone debt underperformed German Bunds after the Bank of Japan announced no new measures to stem bond market volatility, further unsettling investors worried about the outlook for the U.S. Federal Reserve's bond purchases.
Investors were also wary of adding to their exposure to higher-yielding bonds as Germany's Constitutional Court started a two-day hearing on the legality of the European Central Bank's bond-buying scheme, which has defused the euro zone debt crisis.
A final ruling is not expected until after German national elections in September.
The BOJ kept monetary policy unchanged as widely predicted, but disappointed some investors who had expected the central bank to extend the duration of cheap fixed-rate funds to calm volatility in Japanese government bonds.
The decision came days after the ECB also disappointed investors by not hinting at further monetary easing soon.
"The market is disappointed that the BOJ didn't take any measures. Once again it's the fact that people are seeing less available liquidity in the market over the coming months," BNP Paribas strategist Patrick Jacq said.
"The fact that the market is no longer discounting any further rate cut in the euro zone is adding to stress on liquidity. This is why peripherals are being hammered and even core markets are suffering from this."
Greek bonds were the euro zone's worst performers, with 10-year yields jumping 43 basis points on the day to 10.02 percent. The yield had earlier hit its highest since early May at 10.65 percent.
Athens's failure to attract any bids for state-run gas firm DEPA, making it likely that bailed-out Greece will miss a binding target to raise at least 1.8 billion euros from privatisation by end-September, exacerbated the sell-off.
Yields on bonds of Ireland and Portugal, two other euro zone strugglers which have been bailed out, also rose sharply.
Ten-year Irish yields climbed 15 basis points to 4.23 percent and their Portuguese counterparts 24 bps to 6.49 percent. Portuguese yields hit their highest since mid-April at 6.7 percent.
"It's more than just a pure consolidation. In the case of Portugal, we are now also talking about what does that mean in terms of their comeback story in the primary (bond) market," said David Schnautz, interest rate strategist at Commerzbank.
Last month, Lisbon sold a 10-year bond, its biggest step yet towards exiting its EU/IMF bailout.
Spanish 10-year yields were up 7 bps at 4.66 percent and the Italian equivalent were 8 bps higher at 4.36 percent.
"There's just an overhang of this stuff (peripheral euro zone bonds) and people are off-loading some of it. And maybe at the margin there are nerves about this OMT (ECB bond purchase scheme) hearing. It's all very fragile," a trader said.
The German Bund future settled 11 ticks lower at 142.74, having fallen as far as 142.02 earlier - its lowest since mid-February. Ten-year German yields were 1.2 basis points higher at 1.56 percent.
Trending On Reuters
We are living longer but not creating financial plans to keep pace. Advisers give tips on how to make sure you don’t outlive your money. Video