LONDON: Bunds edged higher on Thursday, drawing support from further warnings that banks may be hit by the spreading euro zone crisis, but bond investors were waiting to see the extent of any ECB debt purchases before betting more on German debt.
Moody's cut the ratings of 12 German public-sector banks, believing they are likely to receive less federal government support if needed. Fitch said it may lower its stable rating outlook for US banks with large capital markets businesses due to contagion from the euro zone turmoil.
"There is all this talk about banks ... it all reads vaguely supportive for Bunds," said one trader. "But Bunds haven't traded that well this week at times ... ECB buying yesterday (on Wednesday) was fairly aggressive, we have to see if they come back in again."
ECB purchases of Italian and Spanish bonds cited by traders on Wednesday brought only temporary relief for bonds issued by the euro zone's most indebted states and kept Bunds lower.
At 0721 GMT, Bund futures traded 12 ticks up on the day at 138.27.
The intensifying angst in financial markets did not bode well for Spanish and French auctions later in the day.
Spain is likely to face higher borrowing costs at a 3-4 billion euros auction of 10-year debt, but the sale is likely to find enough demand, especially from domestic investors.
"The yield 'roll' relative to the previous benchmark, the Apr-2021, was yesterday in excess of 25 basis points," Luca Jellinek, European head of fixed income at Credit Agricole, said in a note.
"The real issue, for market sentiment, right now, is not pricing but the amount bid and placed."
France, the bloc's second-largest economy, also plans to sell 6-7 billion euros of debt in an auction which would test investors' appetite in a market environment in which Germany is increasingly seen as the only safe haven in the euro zone.
The French/German 10-year yield spread hit its highest in the euro era on Wednesday at close to 200 basis points.