LONDON: German government bonds edged lower on Wednesday after rallying sharply the previous day but concerns over the euro zone debt crisis and economic outlook supported the market with benchmark yields having fallen around 40 basis points during August.
Lukewarm demand at Italian bond auction on Wednesday threatened to push the euro zone's third largest economy back to the centre of the region's debt crisis and focus is now on Spain's sale of up to 4 billion euros of 5-year bonds on Thursday.
"Italy was disappointing yesterday and there's a risk of the same for Spain, although the market is factoring that in already," said a trader.
September Bund futures were 10 ticks lower at 135.18.
Despite having retreated from record highs above 136.00, the contract is up over five points since the start of August, relecting the still fragile sentiment over the euro zone debt crisis and fears of slowing growth in the region and globally.
"People have been taking risk off and are on the sidelines evaluating the markets," said a trader.
"But Bunds are still well supported and we should continue to see buying on dips."
Benchmark 10-year yields were half a basis point higher at 2.127 percent.
Minutes of the US Federal Reserve's August meeting published late on Tuesday also boosted expectations for more stimulus and Treasuries jumped after data showed a plunge in consumer confidence, a further worrying sign for the economic outlook.
A weaker-than-expected number in US private sector employment data on Thursday could see further flows into core government bond markets.
Copyright Reuters, 2011
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