LONDON: German yields slipped on Wednesday before an auction of five-year bonds that some traders say could attract a bit more demand than last month's sale as yields have risen from historic lows this week.
Expectations that the European Central Bank might signal more stimulus measures at its policy meeting on Thursday, with falling oil prices fuelling deflation concerns in the euro zone, also propped up demand for fixed income, driving Italian 10-year yields below 2 percent for the first time.
Germany aims to sell up to 3 billion euros of the five-year paper against a backdrop of a record number of technically "failed" auctions this year when investors shied away from dwindling yields offered by the euro zone's top-rated issuer.
"Yields are not as bad as they were last month ... the auction should go through okay though we don't expect it to be stellar and we might see some metrics on the weaker side but it shouldn't be a burden for the overall market," Commerzbank strategist, Benjamin Schroeder, said.
Five-year German yields were unchanged before the auction at 15 basis points (bps), having come up from lows of about 12 bps seen around last month's lacklustre auction of the paper. Yields on 10-year Bunds, the benchmark for euro zone borrowing costs, were one basis point lower at 0.74 percent, having hit a record low of 0.69 percent last week on expectations that Thursday's ECB meeting could pave the way for government bond purchases to shore up the euro zone economy and lift stubbornly low inflation.
While the ECB is not expected to impose any measures straight after this week's meeting, with policymakers still assessing recently launched asset-backed securities and covered bond purchases, President Mario Draghi's news conference will be closely watched for a steer on the timing of further stimulus.
Italian 10-year yields fell 2.5 bps to a record low of 1.999 percent while Spanish yields dipped 2 bps to 1.84 percent , within sight of their all-time low.
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