LONDON: German government bonds fell on Friday as some investors took fresh bets on expectations the European Central Bank will next week announce a clear plan for buying bonds, looking beyond a keynote speech by the head of the Federal Reserve.
But given uncertainty surrounding possible policy shifts by both central banks, many market players stuck to the sidelines and trading was thin.
In a speech on Friday afternoon, Fed Chairman Ben Bernanke is expected to acknowledge the US central bank is considering further monetary easing, but could disappoint some if he stops short of signalling a third round of bond-buying is imminent.
But the reaction in Europe is expected to be short-lived, with many investors waiting on details of a radical European Central Bank plan to buy bonds which is to be fleshed out during a policy meeting next Thursday.
"For Bunds, Bernanke is an important staging post but it is the ECB meeting which is paramount," said Rabobank rate strategist Richard McGuire.
Confirming that view, September Bund futures fell nearly a full point to 143.17 with traders pointing to comments from the European Central Bank's Benoit Coeure, confirming that the bank is working on a bond-buying plan.
"It's more noise, but it's the end of the week, the end of the month and if you were long, at the margin that maybe enough to take some profits," a bond trader said, referring to Coeure's comments.
Bunds were last down 80 ticks on the day at 143.35.
German debt was likely to track US Treasuries following the Bernanke speech, but opinions were mixed on the direction of the move if his words fell short of expectations.
Anything short of a commitment to new quantitative easing could see bonds rise as a result of a fall in stock markets, but equally the disappointment of the Treasury not committing to purchases could weigh on bond prices.
As a result, the likely outcome was a knee-jerk move that had some spillover into European markets but quickly unwound heading into the weekend.
"People (in Europe) will be at their desks for this, they've waited long enough to hear it, but if it turns out to be a bit of a letdown they'll be clearing the streets pretty soon," a second trader said.
ECB FOCUS
The long-term direction of euro zone sentiment was likely to be dictated by whether the ECB provides enough details of its bond-buying plans to justify the rally in peripheral debt seen since the plan was first mooted.
The prospect of ECB intervention has helped lower borrowing costs since late July for the plan's likely beneficiaries Spain and Italy.
Although well below their highest levels, Spanish 10-year government bond yields were 11 basis points higher at 6.73 percent on Friday, with equivalent Italian yield up 1 bps at 5.82 percent.
Year-to-date returns highlight the disparity between the two issuers, with concerns about Spain - which is expected to ask for a bailout - much higher than those of Italy.
By the end of August, Italian bonds had returned 10.6 percent on a total return basis, according to the iBoxx index, while Spanish bonds had lost 3 percent.
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