Bunds rise before German auction, EU summit

LONDON: German Bund futures opened higher on Wednesday as underlying fears about a potential Greek exit from the euro zone kept the mood volatile before a meeting of European Union leaders later in the day.

Dow Jones quoted former prime minister Lucas Papademos as saying Greece had no choice but to stick with a painful austerity program or face a damaging exit from the euro zone, a risk he said was unlikely to materialise but was real.

An informal EU summit is expected to discuss growth-boosting measures and the idea of a joint euro zone bond. But what could foster growth in austerity times is unclear, while Germany has expressed strong opposition against debt mutualisation.

At 0607 GMT, Bund futures were 53 ticks higher on the day at 143.63, with cash 10-year yields 4 basis points lower at 1.435 percent. Bond markets are usually volatile before major meetings of euro zone policymakers as many investors move to the sidelines and volumes drop.

"Papademos' comments ... were the trigger," one trader said. "Also, I think (the summit) will be a disappointment."

Germany's auction of up to 5 billion euros of two-year bonds will get much of the attention in the first part of the session as it will be a gauge of how scared investors are.

The bonds carry a zero percent coupon as Germany takes advantage of safe haven flows, which are likely to be dominant before Greece's elections on June 17, as investors fear a government opposing the country's bailout deal could take over.

Schatz yields have sunk to record lows of just above 0 percent in recent days and with euro zone inflation at 2.6 percent last month, investors are losing money in real terms.

"(The auction) could be a struggle at these levels," the trader said. "But even if it's fairly poor, I don't see why it's going to trigger a massive sell-off in Bunds. It's all about Greece these days."

Spain will also be closely watched as its government is expected to outline a plan to restructure the recently nationalised Bankia and announce how much additional money it will pump into the bank.