LONDON: German bonds rose on Wednesday and met decent demand at a five-year auction but stuck to tight ranges before a European Central Bank meeting and the main US jobs release later this week.
Equity markets fell, as modest additions to Japan's growth strategy and renewed concerns of a cut in US stimulus efforts hit demand for riskier assets.
Against that backdrop, markets were focused on a slew of US data to gauge when the Federal Reserve may start scaling back its bond purchases, and showed little reaction to mixed data out of the euro zone.
New orders for US factory goods and services sector data were due this session, but the main focus was on the ADP National Employment report ahead of Friday's job numbers, traders said.
"At the moment if you look at where core euro zone bond yields are, they are close to the top end of the recent trading range," Ricardo Barbieri, strategist at Mizuho said.
"So I would expect that if we don't get any positive surprise from the (US) data or the ECB doesn't sound more hawkish than expected, there will be a bit of a pullback in yields, bonds will rally back a bit."
Ten-year German government bond yields were down 2.5 basis points at 1.48 percent, having hit their highest level in nearly three months on Monday at 1.534 percent.
German Bund futures rose 32 ticks on the day to 143.68 after posting their first monthly loss since January in May.
Market players said the sale of five-year German debt was supportive even though it offered a higher yield but attracted slightly less demand than at a similar sale in May.
Bids were worth 2.0 times the amount on offer compared with 2.1 in May. The yield at the sale was 0.54 percent versus 0.38 percent last time.
"We had the Bobl auction which was OK and we rallied," one trader said. In the secondary market, five-year German yields were flat at 0.54 percent.
Mixed euro zone data provided little direction. While the pace of the euro zone's economic contraction slowed quarter-on-quarter in the first three months of this year, retail sales in April pointed to continued weakness in household demand.
A better than expected euro zone manufacturing survey this week took some pressure off the ECB for looser monetary policy, but Giansanti said investors that are expecting a more upbeat tone on Thursday could be disappointed.
The ECB is likely to keep interest rates at a record low of 0.5 percent at its meeting on Thursday, which is followed by a news conference.
"A more dovish tone from the ECB than what is priced in by the market can lead to a rally in core bond prices," Alessandro Giansanti, senior rate strategist at ING said. "We think the sell-off has gone too far so we are more inclined to have a reversal at the moment, to have lower core yields."
Lower-rated debt prices were also in tight ranges. Spanish and Italian bond yields were up slightly at 4.44 percent and 4.12 percent respectively.
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