LONDON: German government bonds edged up on Friday, stabilising after a sell-off this week with riskier assets under pressure due to markets' disappointment at the lack of progress from a meeting of German and French leaders on battling the debt crisis.
France and Germany agreed on Thursday to stop bickering openly about whether the European Central Bank should do more to rescue the euro zone from a deepening sovereign debt crisis, but had little else to offer after a meeting with Italy's new prime minister.
Germany maintained its opposition to common euro zone bonds and there were no signs of cracks in its resolve to resist pressure for the ECB to take more radical action.
December Bund futures were 9 ticks higher at 135.14, stabilising after a sharp sell-off in the wake of a dismal 10-year bond auction on Wednesday.
"Bunds are really just too cheap at the moment, the market is trading like it expects armageddon and equities are trading like they expect some sort of muddle through, but Bunds are usually right," said a trader.
"Very few people are doing anything other than the trading they have to do but we'd expect to see tentative buying again around the 2.25 percent level."
Ten-year yields were half a basis point lower at 2.129 percent, after the range in place since August bounded by yields at 2.20 percent held on Thursday.
"Rallies now look running out of steam sooner than before, given the changing credit perceptions," Commerzbank strategists said, but they added that the upside for yields looked limited given a weakening economic backdrop.
Appetite for Italy's short-term debt will be tested at an auction of up to 8 billion euros of 6-month bills with yields indicated at 5.85 percent in the grey market late on Thursday.
That compares with a gross yield of 3.535 percent at the last sale of 6-month bills a month ago, but traders expect the sale to be supported by domestic demand.