LONDON: German government bonds fell on Wednesday before a five-year debt auction, as investors remained optimistic that euro zone policymakers will agree on a comprehensive plan to tackle the crisis at a summit this week.
Such hopes are offseting for the moment recent warnings by Standard & Poor's that it may cut the credit ratings of 15 euro zone countries, including those of France and Germany, as well as that of the region's rescue fund.
At 0705 GMT, Bund futures were 44 ticks lower at 134.34, with 10-year cash yields up 4.5 basis points at 2.18 percent. European shares were expected to continue their rally
"We're waiting for the ECB and for the summit and hopes remain high," one trader said.
Some of the focus has shifted towards a European Central Bank meeting on Thursday. The bank is expected to cut interest rates by 25 basis points to 1 percent and provide longer unlimited euro loans to banks.
But investors will be watching for any signals that the bank was ready to step up its purchases of Italian and Spanish government bonds in secondary markets if politicians commit to deeper fiscal union within the euro zone.
Germany plans to issue around 5 billion euros in a reopening of the October 14, 2016 five-year bond, which carries a 1.25 percent coupon.
The country has seen several auctions receiving less bids than the amount on offer, with investors put off by low returns despite the safe-haven nature of the bonds.
"As this is the final tap of the bond and the yield is likely to be higher than the previous reopening, which had an average yield of 1 percent, we expect the auction to be solid enough so as not to panic the market," Credit Agricole rate strategist Peter Chatwell said in a note.
Five-year Bobl yields were last 4.1 basis points higher at 1.145 percent.
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