LONDON: German government bonds edged higher on Thursday before an anticipated cut in euro zone interest rates and an EU summit, with most investors sidelined by deep uncertainties over whether politicians will do enough to stem the debt crisis.
Bonds from highly indebted countries on the euro zone periphery were also broadly steady consolidating after yields began to rise again on Wednesday when a German official dampened expectations of major breakthroughs at the summit.
Italian bonds gave up early gains made after international and domestic clearing houses LCH.Clearnet SA and Cassa di Compensazione e Garanzia (CC&G) cut the cost of using the country's bonds to raise funds. The move following some easing in Italian yields.
The European Central Bank is expected to cut rates and unveil a new package of bank aid, while investors will also look for any hint it will intensify its bond buying support for the euro zone's struggling peripheral economies.
While peripheral bonds were likely to come under pressure if the ECB does not meet expectations, particularly on bank aid, Bunds were likely to retain support whatever the outcome.
"The risk is they don't deliver enough, especially for banks. The market is worried about the redemptions they have next year," said ING rate strategist Alessandro Giansanti.
"That would be supportive for Bunds...and if they are aggressive in cutting rates, the market will price in more for next year." Some already expect the ECB to cut again early next year, although markets are not yet fully pricing this in.
March Bund futures oscillated around flat and were last nine ticks higher at 135.60 with 10-year yields half a basis points lower at 2.056 percent.
"The risk is that the ECB under-deliver and we see a bit of disappointment but perversely that could eventually support Bunds," a trader said.
"Positioning is very light and we're likely to stay volatile, there's a lot of event risk."
UBS technical analyst Richard Adcock said that after Wednesday's rally Bunds could rise further while they traded above Monday and Tuesday's 134.20 and 134.22 lows, with a break above Wednesday's high of 136.21 opening the way to 137.22 initially.
French President Nicolas Sarkozy and German Chancellor Angela Merkel will propose to the summit a plan to impose mandatory penalties on euro zone states that exceed deficit targets, aiming to restore market confidence and prevent the region's debt crisis from spiralling out of control.
But optimism the summit would lead to a turning point in the euro zone's debt crisis took a hit after a senior German official gave a downbeat assessment on Wednesday of prospects for an agreement.
Even measures beyond what the market is expecting are unlikely to tempt many to buy bonds ahead of year-end though.
"I think will be a knee jerk reaction and we'll probably see some of the (fast money) come back into the market but it's hard to imagine what the big solution could be," said a second trader.
"More likely we'll see a little bit of buying on the headlines and then once they've been picked through we'll be back where we were if not wider."
A senior euro zone source said euro zone countries are likely to agree to lend 150 billion euros to the International Monetary Fund but a proposal to give the euro zone's permanent bailout fund, the European Stability Mechanism, a banking licence which could allow it to access European Central Bank funds boosting its firepower were off the table. "That's not even a pea-shooter, let alone the bazooka," said the second trader.
Comments
Comments are closed for this article.