Bunds up, supported by US, euro zone debt worries

LONDON: German government bonds rose at Wednesday's open, supported by doubts whether measures to stem the euro zone debt crisis were enough to stop contagion to the region's larger economies and with US debt talks deadlocked.

Although Treasuries have held up relatively well -- helped by the large size of the market and widespread holdings -- risk assets have come under pressure on worries the US may lose its triple-A credit rating even if a last minute deal to avoid a debt default is hammered out.

Serious discussions about the borrowing limit looked to be delayed for several days after Republicans pushed back a House of Representatives vote on their plan originally expected for Wednesday. "People are using the US debt impasse and volatility of spreads in Europe to do very little at this time so you're seeing some very extreme moves," a trader said.

September Bund futures were 24 ticks higher at 128.58 with 10-year yields down one basis point at 2.730 percent.

Last week's sweeping plan to help Greece and stem contagion provided only limited relief to markets, with Bunds and Spanish and Italian bond yields back around levels seen before details of the rescue plan were leaked.

"Lack of detail and implementation risks (for the Greek package), as well as the US debt ceiling debate nearing its deadline should keep markets tending towards 'risk off' mode today," said Commerzbank rate strategist Benjamin Schroeder.

Italy will sell up to 1 billion euros of euro zone index-linked bonds, the second of three sales totalling around 10 billion euros this week.

"There's been quite a concession built in and the small volume means it should go okay," the trader said.

"But the market perception of auctions as a test of sentiment is wrong as the primary dealers have a gun to their head to take down the paper."

Bill auctions in Spain and Italy on Tuesday highlighted the nervy mood in markets, weighing on the issuers' debt and pushing 10-year Spanish yields back above 6 percent.

Copyright Reuters, 2011