LONDON Investors cash fleeing Japan's massive stimulus plans in search of higher returns lifted yields on Friday to record levels on government bonds across the euro zone.
The Bank of Japan launched the world's most aggressive monetary stimulus on Thursday, pledging to inject about $1.4 trillion into the economy in less than two years by buying government bonds and exchange-traded funds.
On Friday, the ripples from that announcement hit some euro zone markets, mainly bonds which carry a solid credit rating and a relatively high return. French, Dutch, Austrian and Belgian bond yields all fell to record lows on the demand. <GVD/EUR>
Cash also shifted from Japan into other higher yielding assets. Poland's deputy finance minister cited large Asian inflows to the Polish bond market.
Polish 10-year bond yields fell to 3.74 percent on Friday, nearing an all-time low of 3.68 percent hit in December.
French 10 year bond yields hit 1.72 percent, a record low but still robust versus less than 0.5 percent and a weakening currency on Japan's equivalent.
Traders said the moves were driven by a shift out of Japanese government bonds (JGBs), in which futures prices ended a tumultuous session down more than two full points and 10-year yields rose.
"The strong sell-off we saw today in the JGB sector offered some evidence that private investors in Japan have no longer appetite for domestic sovereign debt," Patrick Jacq, rate strategist at BNP Paribas, said.
"The Bank of Japan will purchase massively domestic sovereign debt and private investors will buy foreign debt because they want to have some yield," he said.
Market participants said concern that the yen's steep decline against both the euro and the dollar was undermining the value of Japanese bonds, prompting the search for a more stable investment.
The yen was relatively steady versus the euro at 124.36 on the day, but it has fallen 8.8 percent this year because Tokyo has made clear it is prepared to stimulate its economy out of a two-decade-long slump.
The stimulus plan may also stir some European equities.
Traders picked out luxury good firms such as Hermes (HRMS.PA) and Louis Vuitton (LVMH.PA) as likely longer-term beneficiaries of more abundant cash in the Japanese economy.
But, short-term concerns that the weakening yen would erode the upswing meant the shares failed to show any outperformance over other stocks.
"The plunge in the yen is hitting hard on luxury companies because Japan is a big market for luxury goods. The sector has had a strong pricing power, but there's a limit to that. You can't just hike prices by 25 percent to keep up with the yen," a Paris based fund manager said.
Bond dealers also cited early central bank buying of euro zone debt, including from Asia, but few had seen large Japanese institutional buyers in the market first hand.
Efforts to get ahead of any new trend driven by external cash exacerbated the fall in yields as dealers loaded up on paper to sell on at a later date in anticipation of more investors switching out of Japanese government bonds.
"If bondholders are liquidating long JGB positions, especially in Japan, then there's a very strong chance there may be demand for overseas European bonds or U.S. bonds or bonds outside of Japan," said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank.
"I think this will become a feature as time goes by, where Japan will liquidate domestic holdings of cash or JGBs and venture into overseas assets in order to try and raise the return."
(Additional reporting by Simon Jessop, Jessica Mortimer and Ana Nicolaci da Costa in London and Blaise Robinson in Paris. Editing by Jeremy Gaunt.)