LONDON: German Bunds extended losses on Wednesday, tracking overnight falls in Treasuries as upbeat US data in the previous session lent support to the view the Federal Reserve may scale back its monetary stimulus.
US home prices accelerated by the most in nearly seven years in March while consumer confidence surged in May, data on Tuesday showed.
Investors will look at unemployment and inflation data out of Germany on Wednesday to gauge the strength of the euro zone's largest economy as the European Central Bank mulls its next policy move.
German Bund futures were 15 ticks lower at 143.67, having hit their lowest since mid-March earlier this session at 143.26. Analysts said a break of key support levels had put a downbeat complexion on bonds.
"The Bund fell through 144.22, so even if we now go higher - and it might be the case - then we still stay in a negative environment for bonds," Piet Lammens, strategist at KBC said.
"We would go for a sell on upticks if we go higher in the bond markets."
The fall in Bunds has been led by US Treasury prices but the yield gap between the two assets hit its widest since June 2010 in the previous session as their economic outlooks look to be diverging.
The 10-year US/German yield gap was at 68 bps, only a whisker away from the 69 bps it hit on Tuesday.
"We think the market has overplayed the short-term risk that the Fed will change its policy, that they will start tapering QE (quantitative easing). We think it's too early for that," said Elwin de Groot, senior market economist at Rabobank.
"Very near-term, I would say movement has been a bit overdone so we could see a slight reverse in the widening that we have seen, perhaps to 50-60 bps. But from there, over the course of the second half of this year, we could see a further widening towards 90-100 bps."
Concerns that the strong US data would encourage the Fed to scale back monetary stimulus hit riskier markets and lower-rated peripheral debt came under selling pressure.
Ten-year Spanish government bond yields were up 4 basis points at 4.34 percent, while Italian yields rose 3.4 bps to 4.08 percent.
The European Commission will release its annual review of members' economic and debt-cutting policies on Wednesday and is expected to give France, Spain, Slovenia and others more time to get their budget deficits down to target.
Markets were already pricing in more lenient recommendations. Analysts said the market impact should be muted unless they end up being strict.
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