LONDON: German government bonds were steady on Thursday ahead of an anticipated easing in euro zone interest rates and an EU summit with investors sidelined given uncertainties over whether politicians can do enough to stem the debt crisis.
The ECB is expected to cut rates and unveil a new package of bank aid, while investors will also look for any hint the central bank will intensify its bond buying support for the euro zone's struggling peripheral economies, setting the stage for a critical euro zone summit on Friday.
"The risk is that the ECB underdeliver and we see a bit of disappointment but perversely that could eventually support Bunds," a trader said.
"Positioning is very light and we're likely to stay volatile, there's a lot of event risk."
March Bund futures were flat at 135.80 with 10-year yields half a basis point higher at 2.064 percent.
French President Nicolas Sarkozy and German Chancellor Angela Merkel will propose to the EU summit a plan to impose mandatory penalties on euro zone states that exceed deficit targets, aiming to restore market confidence and prevent the region's debt crisis from spiralling out of control.
But hopes that the summit would lead to a turning point in the euro zone's debt crisis have taken a hit after a senior German official gave a downbeat assessment of prospects for an agreement.
"It looks difficult for the ECB to beat market expectations today and headline risk remains elevated...pre-summit," said Commerzbank strategist Rainer Guntermann, adding because of that the bank preferred to maintain a neutral position for Thursday's trading session.
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