LONDON: Demand for safe-haven German government bonds was firmly underpinned on Monday with unrest in Libya continuing to unsettle investors and as rising oil prices raised concerns about economic growth.
Bonds consolidated their recent rally as the price of Brent crude oil climbed to a peak of $114.50, up over $2 a barrel, driven by concern about the impact of conflict in Libya on oil supply.
"In terms of market indicators, oil is definitely the one to watch... everyone is calculating what a $10 spike in oil does for GDP over the year and what effect a persistently high oil price would have on the recovery," said Micthael Leister, strategist at WestLB in Dusseldorf.
Bond futures were unchanged at 124.32 after earlier hitting a session high of 124.52, with technical charts highlighting the first resistance level at last week's high of 124.60.
"Targets are for buying through last week's 124.60 top to test 125.18, the bearish trend of failed rallies since last year's top, with a break here opening the way for a more significant improvement in sentiment to 125.58," said Max Knudsen, director at PIA First.
The 10-year German bond yield was down 1.6 basis points at 3.131 percent, while the two-year yield fell 2.2 bps to 1.421 percent.
Among the euro zone's lower-rated sovereigns Irish debt will be closely watched in coming sessions after the country's main opposition party claimed a historic election victory. The centre-right Fine Gael party are seeking a mandate to renegotiate a bailout deal with Europe.
Analysts said that with a coalition government yet to be formed it was too soon to gauge the market impact of the result.
The cost of insuring the country's debt rose 9 bps to 605 bps while the premium investors demand to hold 10-year Irish bonds rather than equivalent German paper was steady on the day at 605 bps.
SUPPLY PRESSURES
Belgium kicks off a busy week of debt auctions in the euro zone with the sale of 2014 , 2021 , and 2028 bonds. The auction will be closely watched given the eight-month-long political deadlock in the country, which has raised concerns about its ability to tackle high debt levels.
"It should go fairly well... the overall size is quite small and bidding by domestic banks, we expect, will be quite high," said WestLB's Leister.
"Nevertheless, the feedback we're getting is that indeed Belgium is seen as less favourable given the fundamentals and their political situation is going nowhere... so the demand from the real money side is not going to be too great."
The Belgian/German 10-year yield spread was last at 108 bps, widening slightly ahead of the auctions, but well off a euro-era record of around 150 bps reached in November.
Total supply from across the currency bloc this week could reach around 27 billion euros.
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