Spreads bounced back from a slow start and resumed the rally that was cut short over the last week, with concerns over rising Japanese government bond yields causing spreads to widen this morning.

Talk of a bond bubble has increased in recent weeks, fuelled - at least in part - by the Bank of Japan's loosening of monetary policy. Rising yields probably reflect higher inflation expectations - effectively an endorsement of the BOJ's measures.

To this end, the Markit iTraxx Japan was 5bps wider at 178bps, a significant move, but one that should be kept in perspective. The index is still more than 60bps tighter than where it started the year.

In Europe, the appetite for yield was all too evident, and nowhere more so than in Spain. The sovereign sold 12-month bills at a yield of less than 1% for the first time since April 2010, and a new 10-year syndicated benchmark bond priced at 278bps over mid-swaps received bids of around €20 billion.

Spanish oil firm Repsol yesterday sold a seven-year bond at a yield of just 2.72%, yet another sign that demand for bonds remains robust, regardless of the risk. Investors are clearly confident that central banks are no nearer to turning off the liquidity taps.

Siemens is one of many European companies to have taken advantage of the favourable funding conditions. It has issued debt at very low levels and used the proceeds to fund share buybacks and acquisitions.

Moody's said today that this contributed to its decision to place the German firm's Aa3 rating on negative outlook. But this had little impact on Siemens' spreads - they widened just 1bp to 49bps. The company still trades like a solid AA credit, according to Markit's implied rating, and its spreads are a far cry from the 100bps levels seen 12 months ago.

Overall, the market was tighter, with the Markit iTraxx Europe 1.25bps tighter at 95.5bps.

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