LONDON: Low-risk German debt weakened on Monday as expectations that the world's major central banks would keep easing monetary policy overshadowed concerns about how the euro zone tackles its debt problems.
Higher-yielding euro zone bonds rose slightly and were seen likely to remain supported by the vast amount of liquidity in the market and by expectations of even more central bank cash injections globally in the future.
Euro zone finance ministers backed a 10 billion euro bailout for Cyprus on Friday, but the island had to come up with 13 billion to cover its financing needs over the next three years.
That sum was almost twice as much as initially expected by market participants and raised concerns that ultimately Cyprus will need more cash.
Cyprus was not the only trouble spot in the region. Italy is still searching for a government after its inconclusive elections in February, Spain has asked Europe for more time to cut its budget deficit, while even higher-rated countries such as France battle a lack of growth.
Efforts to reform the euro zone banking system are perceived as having slowed down after Germany said on Saturday the plan would need changes to European Union law.
However, expectations of a European Central Bank interest rate cut later this year, the backstop of bank's as yet untested bond-buying programme (OMT) and the prospect of unprecedented monetary easing in Japan kept markets relatively calm.
"Overall you would say it's a negative backdrop," Rabobank rate strategist Lyn Graham-Taylor said.
"But as we've seen in the past several weeks or months with the problems in Cyprus, the lack of government in Italy, the market is focusing on the approaching liquidity wall."
Bund futures were 20 ticks lower on the day at 145.68, while 10-year cash yields were 2 basis points higher at 1.27 percent.
In the euro zone periphery, Italian 10-year yields were 2 bps lower at 4.32 percent, having fallen more than half a point in the past three weeks, while equivalent Spanish yields edged down to 4.69 percent.
"It has to do with the ECB and the easy money around searching for yield. The money needs to go somewhere," one trader said.
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