LONDON: German Bund futures hovered near one-month highs and Spanish 10-year yields remained over the 7 percent mark on Tuesday after a meeting of euro zone finance ministers produced little to improve appetite for riskier assets.
Continued caution on the part of investors is likely to benefit higher-yielding, non-peripheral markets like France or Belgium as well as safe-haven German debt, with demand for Italian and Spanish bonds remaining fragile.
Earlier on Tuesday, euro zone ministers agreed to grant Spain an extra year, until 2014, to reach its deficit reduction targets and set the parameters of an aid package for its banks that it is hoped will prevent Madrid needing further aid.
But with 10-year Spanish yields above the key 7 percent level beyond which countries such as Portugal or Ireland were eventually forced out of capital markets, investors continued to fret about a potential sovereign bailout.
Market attention is now focused on a German constitutional court hearing later in the day on whether Europe's new bailout scheme and budget rules are compatible with national law.
The hearing may indicate how long will it take for the court to make a decision. Anything more than a few weeks would mean serious delays to implementing recently agreed measures to allow the ESM rescue fund to inject aid directly into banks and purchase government bonds in secondary markets.
"We've heard nothing concrete (from the Eurogroup meeting) so ... the tension is turning more and more to the constitutional issues in Germany and the implementation risk," DZ Bank rate strategist Michael Leister said.
"If there is a positive ruling it won't have much of an impact because it is more or less the consensus. But if it implies further headwinds for the broader solution to the debt crisis it would raise pressure on (peripheral) spreads."
Bund futures were last 10 ticks higher at 144.09, having hit a one-month high of 144.28 on Monday.
The previous session's high is seen as the next resistance level and if broken, Bunds would then target 144.63, the 78 percent retracement of June's decline, according to technical analysts at 3C Analysis. In the opposite direction, Bunds would find support at Monday's low of 143.85, they said.
HUNT FOR YIELD
Two-year German bond yields dipped in and out of negative territory, last trading at -0.01 percent, while 10-year yields were flat at 1.32 percent.
Ultra-low yields in Germany are pushing investors towards markets perceived as riskier, but not as risky as Spain or Italy, where they can find better returns.
French, Austrian and Belgian bonds have all rallied since the European Central Bank cut its rate to zero on Thursday for the deposit facility used by banks to park cash with the central bank overnight.
Belgian 10-year yields were last stable at 2.87 percent, near the record low of 2.736 percent hit on Friday. This compares with levels around 6 percent seen in November, during the previous wave of the euro debt crisis.
"This (trend) can persist as long as the bid for safety continues to dominate ... meaning that you have no choice but to search for yields in this kind of market," BNP Paribas rate strategist Patrick Jacq said.
"As long as there is no recovery in risk appetite fuelling more demand for peripherals I don't think this can change dramatically."
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