LONDON: Two-year German bond prices rose on Wednesday after investors took advantage of a recent pick-up in yields to stock up on the country's short-dated paper at an auction, but analysts said the technical outlook for German debt broadly remained bearish.
German Bund futures erased losses after the auction results. Despite concerns over growth and fiscal slippage in the euro zone, analysts expected a further selloff down the line.
"Against the backdrop of the sharp sell-off we've seen at the front end and the receding Greece-related uncertainty it is encouraging," Michael Leister rate strategist at DZ Bank said of the auction results.
"It appears to us that at levels around 30-35 basis points in Schatz yields investors are willing to put their money back to work again."
Two-year yields were down 1.3 basis points on the day at 0.32 percent, having stood at around 0.34 percent before the auction results.
The German Bund future was 7 ticks higher on the day at 135.71, off the day's lows of 135.30. U BS technical strategist Richard Adcock said in a note that Bunds were bearish while they traded below the 136.72 retracement level.
Analysts said 2.10-2.20 percent on the 10-year German yield was a key support level. It rose as far as 2.08 percent earlier - its highest since December 2011.
"The 10-year German yield appears to be consolidating marginally above 2 percent with bulls looking to push it back below 2 percent while bears will probably be looking to hit the 200-day moving average which is currently at 2.11 percent," Credit Agricole said in a research note.
"Our medium-term view is for higher Bund yields and technically we can see no strong support for the Bund (June 2012 contract) yet," it said. "We expect the trigger for another sell off is more likely to come from the US Treasury market."
CATCH-22
One trader said the bearish technical outlook for now was dominating trade, but concerns over fiscal slippage in the euro zone was a reminder of the Catch-22 facing the region.
In order to put the euro zone back on a sustainable fiscal footing, countries have embarked on austerity drives that risk choking still-stagnant growth.
Member countries have continued to demonstrate a varied economic performance compared with a strengthening US picture, leaving markets in Europe vulnerable.
Indeed, some peripheral bonds also came under pressure on Wednesday, with Italian 10-year yields up slightly at 4.91 percent, while the Spanish equivalent rose 2.2 bps to 5.26 percent.
March purchasing managers' indexes on Thursday could provide further evidence of the breadth of the euro zone recovery.
"We still see a number of stumbling blocks and obviously one of the biggest is the economies in Europe that are still extremely weak. The austerity measures that need to be taken will only depress growth further so the near-term outlook is not exactly buoyant for Europe," Elwin de Groot, senior market economist at Rabobank said.
"Therefore we think that the market doesn't have a lot of potential to sell off sharply again."
He expected 10-year yields to remain around current levels for the next month or so and then fall back to 1.8 percent in a three-to-six month horizon.
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