LONDON: German Bunds fell to their lowest since February on Thursday as an improved global economic outlook inspired selling of safe-haven assets but market players expected it to be a temporary correction rather than the beginning of a sustained sell-off.
After a Greek debt restructuring gave the market breathing space in the euro zone debt crisis, better data from the United States and an upgraded outlook from the Federal Reserve boosted confidence on markets.
This provided a favorable backdrop for Spain's sale of 3 billion euros of short-term and medium-term bonds, even though it was in the middle of the target range. France sold 8.46 billion euros across the curve.
But market players expect buyers to come back into the market when the 10-year German government bond yield rises above 2 percent.
"It looks to be more of a corrective sell-off ... rather than any big signal of a change in investment ideals in the market. I think the Bund is likely to get support at 2 percent," Peter Chatwell, strategist at Credit Agricole, said.
"That level is really important. If we would see the Bund sell off through 2 percent, I think that would probably trigger more selling in (US) Treasuries, along with Bunds and also (UK) gilts."
Ten-year German government bond yields rose 2.3 basis points to 1.98 percent.
German Bund futures earlier fell to their lowest since February at 136.26 but last stood at 136.51, 29 ticks lower on the day.
Societe Generale said the Bund was likely to decline as low as the 132.63/89 support zone, after breaking below the 136.93 support level and before rebounding again.
"We've maybe had a bit of an over-reaction," a trader said, adding he was a "tentative buyer" when 10-year German yields moved above 2 percent.
He said there were a series of potential risks ahead, including French and Greek elections.
"I don't think we are out of the woods yet ... I don't think (we are) full-steam ahead in terms of economic recovery."
IN ITALY'S SHADOW
Spain's bond sales grew strong support from investors flush with central bank funds casting off doubts for now the country will be able to stick to its deficit commitments while the economy stutters.
The sale of 2015 drew bids for five times the amount on offer, while the 2016 bond saw a bid-to-cover ratio of 4.1 - above those of previous sales.
"The trick of issuing less seems to have worked. This is much less than what the market has been used to this year," said Achilleas Georgolopoulos, rate strategist at Lloyds.
The Treasury would have met just shy of 45 percent of its issuance plans for the entire year if it had sold at the top end of its 2.5 -3.5 billion euro target range.
"Certainly the initial impression is that the Spanish auction is not nearly as well received as the Italian auction. That should continue to ensure that Italian bonds outperform Spanish bonds in the near term. The biggest disappointment is they didn't manage to raise the maximum target," Nick Stamenkovic, strategist, RIA Capital Markets said. Strong demand at a 6 billion euro auction of Italian debt from cash-rich banks, which drove Rome's three-year borrowing costs to a near-17 month low benchmarks.
After the auction, Spanish bonds continued their recent underperformance versus Italy in the secondary market.
Ten-year Spanish yields were steady at 5.16 percent while Italian bonds rose, with yields falling 2.5 bps lower to 4.84 percent.
The 10-year yield spread between the two stood slightly above 30 bps, after reaching parity in early March.
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