Bund rallies on disappointing French-German meeting

LONDON: German government bonds rose on Wednesday and were likely to remain supported as French and German plans for closer fiscal integration failed to convince investors that leaders had gone far enough to tackle a spreading regional debt crisis.

The German Bund future opened 42 ticks higher at 133.53, after rising as high as 133.79 in after hours trading.

French President Nicolas Sarkozy and Chancellor Angela Merkel on Tuesday vowed to stand side by side in defending the euro and laid the groundwork for future fiscal union. .

But they stopped short of increasing the bloc's rescue fund and disappointed investors by declaring that any thoughts of common euro bond issuance would have to wait.

Support for a common bond had been growing as it is increasingly seen as a way to allow highly indebted euro zone countries to regain access to commercial markets while providing investors a safeguard through joint liability.

"Predictably, Tuesday's meeting between Angela Merkel and Sarkozy offered a statement of intent and floated some generic ideas, rather than offering concrete details on the next steps of how Europe's crisis will be resolved in the immediate future," Societe Generale said in a research note.

Italian 10-year government debt yields would come in focus after falling below 5 percent for the first time in five weeks in the previous session as the European Central Bank continued to buy bonds from those countries.

Analysts have said that the ECB needs to maintain consistent and steady purchases of those bonds to keep funding costs at affordable levels.

Investors will also keep an eye on US producer prices later in the session, after data on Tuesday showed US industrial output recorded its best gain in seven months in July. . There is growing speculation the Federal Reserve could conduct a third round of quantitative easing after saying it would keep interest rates close to zero for some time.

Copyright Reuters, 2011