LONDON: German Bunds fell on Wednesday after new stimulus from the Bank of Japan made riskier assets more appealing, but Spain's reluctance to seek a bailout and activate the ECB bond-buying was expected to limit losses.
The Bank of Japan increased its asset purchase programme by 10 trillion yen ($127 billion) to 80 trillion yen on Wednesday, following the US Federal Reserve's stimulus plan last week, in to revitalise a fading economic recovery.
European stocks rose and safe-haven Bund futures fell 25 ticks to 139.21. Cash 10-year German bond yields were 2.5 basis points higher at 1.63 percent.
"Central banks are still throwing money at things, we ... (expect Bunds to trade) lower simply because stocks are reacting to what's happened in Japan," one trader said.
Bunds have fallen steeply since the European Central Bank pledged to carry out unlimited purchases of bonds issued by troubled euro zone states to ease the bloc's debt crisis.
However, the condition that a country must first request aid from the region's rescue funds is keeping investors on edge and unwilling to sell too much of their German debt holdings.
Spain, the country at the forefront of the debt crisis, appears reluctant to seek a bailout any time soon.
"What has changed in the past weeks is that central banks have removed tail risks. The doomsday scenario is no longer the main case as it had probably been two months ago," said Michael Leister, senior interest rate strategist at Commerzbank.
"What hasn't changed is the idea that politicians don't act as quickly and comprehensively as central banks. Spain needs to ask for aid to keep the party going, so what we see now is a consolidation."
UBS technical analyst Richard Adcock saw the 138.01 low hit on June 29 as a support level for the Bund future.
AUCTIONS
With markets in wait-and-see mode after the ECB's move, an auction of up to 5 billion euros worth of two-year German debt later on Wednesday was expected to meet solid demand.
Commerzbank's Leister said the two-year yields' move back into positive territory this month would also draw back "real money and institutional investors that due to guidelines and other rules were prevented from buying at negative yields."
Two-year Schatz yields were flat on the day at 0.083 percent, having traded as low as -0.1 percent in late July and early August.
Portugal plans to sell 1.5-1.75 billion euros worth of six-month T-bills. Nationwide protests against austerity over the weekend are unlikely to affect the sale, with short-term debt drawing steady demand from local banks, which use the paper as collateral for borrowing cash from the ECB.
"It's a done deal between Portuguese banks and the Treasury, so I don't think the protests should have much impact," ING rate strategist Alessandro Giansanti said.
"I still think Portuguese spreads in general are too wide. Portugal has so far respected its (bailout deal) commitments so unless the situation goes out of control the room for widening is limited."
Portuguese 10-year yields have underperformed their peripheral peers this week. On Wednesday, they were a touch higher at 8.82 percent, while equivalent Spanish and Italian yields were down 5-6 bps at 5.86 and 5.01 percent, respectively.
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