Euro zone bond yields fall after BOJ fires warning shot

By Dhara Ranasinghe

LONDON (Reuters) - Euro zone government bond yields fell on Thursday, pulling away from multi-month highs, after the Bank of Japan fired a warning shot to markets not to push borrowing costs too high following Donald Trump's unexpected victory in last week's U.S. presidential election.

The BOJ on Thursday offered to buy unlimited bonds for the first time under a revamped policy framework and its governor, Haruhiko Kuroda, said the central bank would not stand idly by as Japanese government bond (JGB) yields jump in line with moves in U.S. Treasuries.

The BOJ's decision serves notice to the markets that it is closely monitoring developments as it tries to keep borrowing costs low to spur stubbornly low inflation. Its efforts also raise questions about how far central banks such as the European Central Bank will be willing to tolerate steep and sudden rises in government bond yields.

"The BOJ's move shows that there is a bit more of an effort to cap yields and knowing that, other bond markets can be more stable from here," said Mizuho strategist Peter Chatwell.

The BOJ offered to buy an unlimited amount of bonds at minus 0.04 percent in five-year Japanese government bonds and minus 0.09 percent in the two-year paper, employing a method the bank announced in September when it set an explicit target of "around zero percent" for the 10-year yield.

As JGB yields fell following the BOJ move, borrowing costs in the euro zone followed suit.

Germany's benchmark 10-year Bund yield fell as much as 5 basis points to 0.26 percent, moving away from a peak of 0.396 percent hit on Monday -- the highest level since late January.

Most euro zone bond yields were 1 to 3 bps lower on the day, pulling back from multi-month highs as the BOJ's bond buying brought relief to a market battered by expectations that Trump's economic policies will fuel inflation.

U.S. Treasury prices were also firmer on Thursday, with 10-year yields down 2 bps at 2.19 percent.

Investors were also reluctant to push yields higher for now, after they rose so sharply in a short space of time, analysts said.

"There is a pause in the news flow and we need more information in terms of Trump's economic policies and more news in Europe in terms of the ECB's policies," said Orlando Green, European fixed income strategist at Credit Agricole.

U.S. Federal Reserve chief Janet Yellen testifies to the congressional Joint Economic Committee from 1500 GMT, while ECB President Mario Draghi is due to speak at an event in Frankfurt on Friday.

Draghi may be pressed about his views on the recent surge in bond yields, analysts said.

Spain sold 3.9 billion euros of bonds on Thursday, at the high end of the country's target range. However, yields on the three bonds sold jumped against the backdrop of higher borrowing costs.

France also sold bonds, maturing in 2021 and 2022.

(Reporting by Dhara Ranasinghe, editing by Larry King)