Bonds fall in quiet trade, look to ECB decision

Euro zone government bonds fell on Wednesday, as firmer stock markets usurped investors' attention and a forthcoming European Central Bank rate decision diverted focus away from UK security concerns. Trade was limited to a narrow range in thin volumes with US markets closed for the Independence Day holiday.
The ECB is widely expected to keep rates on hold at 4.0 percent on Thursday, but attention is focused on whether the next rise comes in September or October. Pricing on futures contracts favours a September increase, but if the ECB follows its past behaviour, it would need to signal the move a month in advance, after its meeting on August 2.
"Our general view is that they will go into September although October is a risk, because as rates go higher they will be less inclined to hike as frequently as they have been doing so far," said Dominic Bryant, European economist at BNP Paribas. "It's not as clear that they are going to keep hiking every three months," he said.
At 1555 GMT, the 10-year cash yield was 4.606 percent, up 4.1 basis points on the day, and the interest rate-sensitive two-year Schatz yield was 4.9 basis points higher at 4.491 percent.
"With Independence Day in America and markets closed, the locomotive is missing today. We are in a very tight trading range this afternoon with little turnover. People are desperately looking to go home," said a trader at LBBW in Dusseldorf.
"People are waiting are waiting for tomorrow, for the ECB, and for Friday's jobs data from the United States...no one really wants to be (taking) any positions." The September Euribor futures contract a gauge of short-term euro zone interest rate expectations, was down one basis point at 95.630.
The US Employment Report for June is due on Friday and expected to crown a week of key events. A Reuters median forecast was for 120,000 jobs created in June. The September Bund future was 30 ticks lower at 110.55. Trade was a quiet 800,000 lots.
Bond yields jumped on Tuesday, with the 10-year yield posting its biggest one-day gain in almost a month as the flight to quality bid unwound as fears over bomb threats in the UK dissipated.
British security experts were considering reducing the UK's "critical" security level after police arrested eight people suspected of plotting al Qaeda style bomb attacks. Investors are also waiting for the Bank of England interest rate decision, due on Thursday, with the central bank expected to raise by 25 basis points to 5.25 percent.
In supply, Germany issued six billion euros worth of 10-year bonds which strategists said went well. In the euro zone swaps market, two-year rates were 4.73 percent compared with 4.705 percent on Tuesday. The 10-year swap rate was at 4.902 percent, compared with 4.858 percent.