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 LONDON: German debt futures made a steady start to the week, trading in a tight range as growth concerns kept investor risk appetite subdued, with focus falling on the ECB's cash injection due on Wednesday.

Bund futures - the bellwether of investor sentiment towards the euro zone - were 3 ticks higher on the day at 139.06, reflecting a reluctance to take up large positions before the European Central Bank reveals on Wednesday the demand for its long-term banking loans.

"People are waiting for the ECB's LTRO (Long-Term Refinancing Operation) to see where that cash gets sprayed around. Last time it boosted assets all over the place, so we have to be cautious from here," one trader said.

Concerns over the impact of high oil prices on economic growth saw stock markets fall and the risk-off tone across other asset classes offered safe-haven German government bonds marginal support, traders said.

However, bond investors remained largely fixated on Wednesday's ECB tender. The latest Reuters poll shows markets expect 492 billion euros of demand for the three-year cash, made available by the ECB to help shore up banks' funding positions.

A similar amount borrowed in December spurred risk appetite and caused yields to tumble on debt issued by lower-rated states such as Spain and Italy.

But those expecting a rally on a similar scale may be disappointed this time around, market participants said.

"The short in periphery that was out there at the start of the year has been largely covered. For periphery to do better from here you're looking at people going long ... and that's not happening yet," a second trader said.

Yields on Spanish and Italian 10-year bonds were both 2 basis points higher on the day at 5.075 percent and 5.51 percent respectively.

Strategists at Commerzbank forecast banks would borrow 500 billion euros and said the operation would need to be well in excess of the market's expectations to bring notable relief to higher-yielding debt markets.

"We don't expect a noteworthy relief bounce in risky assets unless allotment comes in significantly above forecasts - say, above 800 billion euros," the bank's strategists said in a note.


Greece's long-running debt problems were also likely to prevent demand for low-risk government bonds drying up, with the country undertaking a tricky debt restructuring and its 130 billion euro rescue subject to parliamentary approval by euro zone states.

"We have some positive factors for risk appetite, with the ECB tender coming up, but we also have some factors that will prevent risk appetite from developing sharply," said Patrick Jacq, strategist at BNP Paribas in Paris.

"There are still some uncertainties regarding ratification (of the bailout) in Europe ... and also the participation rate in the Greek (restructuring). All in all, factors are very balanced."

Germany was expected to endorse the bailout on Monday, even though Chancellor Angela Merkel faces increasing domestic unrest over the provision of a second rescue package to Greece in two years.

Greece has set a March 8 deadline for investors to sign up to a debt swap designed to sharply reduce its debt burden.

Copyright Reuters, 2012

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