LONDON: Bund yields remained within touching distance of record lows on Wednesday, with a 10-year debt auction suggesting strong underlying demand for German paper due to a dim economic outlook and rising expectations of more monetary easing.
German 10-year yields rose before the auction as traders made room for the new paper, but retreated immediately after the 3.3 billion euro sale. Bids were 1.6 times the amount that was sold, a similar result as at July's sale, although the average yield was 12 basis points lower.
In the latest sign of how fragile the euro zone economic recovery is, data showed the region's industrial output contracted unexpectedly for a second month in a row in June.
The currency union is likely to take another hit from tit-for-tat economic sanctions over Ukraine, where government forces are fighting pro-Moscow separatists.
Regional second-quarter gross domestic product data are due on Thursday.
European Central Bank President Mario Draghi has signalled the central bank will keep policy on hold for a while but kept open the option of future asset purchases after last week's ECB meeting, singling out economic risks from the conflict in Ukraine.
German 10-year yields were a touch higher from the previous day at 1.065 percent, having risen as high as 1.086 percent before the auction. They remained near a record low of 1.02 percent hit last week.
"The auction had a pretty good result despite record low yields and that helped support Bunds," DZ Bank rate strategist Christian Lenk said.
"The recovery in the euro zone is pretty weak and we also see the effect of geopolitical fears in the market."
SAFETY
In the latest developments in the Ukraine conflict, Russia's foreign ministry said it would hand over control of a convoy of 280 trucks carrying aid to Ukraine after it had crossed the border. This eased fears that Moscow might use the mission as a pretext to invade Ukraine.
Ukraine said the convoy will not be let in.
"Underlying sentiment remains weak. Until these geopolitical tensions start easing, investors will continue to look for the safety of top-rated assets," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
German bond yields are roughly zero up to the three-year maturity, while four-year yields are about 10 basis points, which is below the European Central Bank's key refinancing rate, reflecting expectations of a prolonged period of low growth and inflation and ultra-easy monetary policy.
The ECB is expected to be the last of the world's major central banks to raise rates, but changing course is proving hard even in economies that are recovering at a good pace.
Markets pushed back expectations of when the Bank of England would hike rates to early next year from December after the UK central bank slashed wage growth forecasts in its inflation report.
Overnight bank-to-bank Eonia lending rates dipped to 0.009 percent from 0.1 percent the previous day, hitting a new record low.
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