LONDON: German government bonds slipped early on Thursday but were set to remain supported, and eventually retest their recent highs, by investors seeking liquid assets into year-end with no end to the euro zone debt crisis in sight.
Bunds rallied on Wednesday with banks preferring to reinvest some of the 489 billion euros of cash from the ECB's three-year tender into safe-haven paper rather than pick up the higher yields on offer on Spanish and Italian bonds, dampening hopes that the periphery would find renewed support from the cheap funding.
"As banks are already full of peripheral debt, it's hard to think they're going to want more," a trader said.
"If you look at repo rates, at bill rates for quality paper, they're negative at the short-end which tells you what people want to be in."
Investors are winding down for year-end and trading volumes are set to dwindle but the threat of mass credit ratings downgrades for the euro zone countries is still hanging over the market with Standard & Poor's yet to announce if it will cut ratings on any of the 15 countries it has on credit watch negative.
March Bund futures were 22 ticks lower at 137.61, although unchanged from levels seen in after-hours trading, while 10-year yields were 1.7 basis points higher at 1.952 percent.
Analysts expect Bunds to eventually retest their recent highs with non-core bond markets likely to come under fresh pressure after Christmas with some 230 billion euros of bank bonds, up to 300 billion in government bonds, and more than 200 billion euros in collateralised debt all maturing in the first quarter of 2012.
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