LONDON: German bond futures fell on Wednesday ahead of a 10-year bond auction, extending a steep selloff seen in the previous session, but the room for further falls was limited with markets still fixated on Spain's rising bond yields.
The pressure remains on Spain after a 100 billion euro bank rescue plan sparked wider concerns over whether Spanish government bonds would be subordinated by the new debt, and whether Madrid could continue borrowing at affordable rates.
Bund futures stood at 142.03, 45 ticks lower versus the previous session's market settlement, but around levels seen in after hours trading, pointing to some stabilisation in prices after Tuesday's sharp fall.
Some market participants cited Tuesday's fall in Bund futures as evidence that the rising cost of shoring up the euro zone was having a negative impact on Germany's creditworthiness.
However, 10-year German bond yields remain at an extremely low 1.47 percent despite Tuesday's rise, and a 5 billion euro bond sale due shortly after 0930 GMT was not expected to be short of bidders looking for a low-risk and liquid asset.
"While Germany's creditworthiness is certainly increasingly affected by further bailouts for the periphery, we do not subscribe to another 'failed' auction and firmly re-iterate our view that Bunds still belong to the safest and most liquid assets globally," said Commerzbank strategists in a note.
Spanish 10-year yields, which hit euro-era highs of 6.86 percent on Tuesday, were seen rising further and testing the 7 percent level which is viewed by many as the point at which borrowing from capital markets becomes unaffordable in the long term.
"Above 7 percent and it gets very messy for Spain," a trader said.
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