LONDON: German government bonds held near three-week highs on Thursday after niggling doubts over Spain's ability to meet budget targets saw lower investor demand at auctions the previous day, rekindling funding concerns for lower-rated euro zone countries.
Spanish bonds are likely to stay under pressure after borrowing costs jumped at the bond sales, although some of the sharp rise in yields may be down to a lack of market liquidity over the Easter holiday period.
"Cracks are appearing again, Spanish spreads over Bunds are wider than they've been all year, so it's not looking pretty," a trader said.
"There's no reason not to buy any dips in Bunds. People are unlikely to want to be short going into the long weekend given the backdrop."
June Bund futures were 4 ticks higher at 138.46 after rallying to their highest level in over three weeks on Wednesday, Ten-year yields were a third of a basis point lower at 1.80 percent, close to the bottom of this year's trading range.
The futures will need to break above Wednesday's 138.74 high to extend gains, potentially to March's high of 139.06.
France will sell up to 8.5 billion euros of bonds ahead of the long Easter weekend in Europe.
"(It) should be fairly well bid based on recent history and interpolating between a very strong German and a rather so-so Spanish auction yesterday," Credit Agricole strategists said.
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