LONDON: German Bund futures rose on Monday as dealers bought back into the market, cheapened after a sharp sell-off, even as Spanish and Italian government bonds continued to benefit from the prospect of eventual European Central Bank intervention.
Bund futures saw their biggest daily fall since October 2011 on Friday following better than expected US data and as investors overcame initial disappointment that the ECB's monthly policy meeting did not approve an immediate return to outright bond-buying.
ECB President Mario Draghi outlined a plan to buy debt in cooperation with the euro zone bailout funds - but not before September - and only if countries ask to use the funds and accept strict supervision.
In the mean time, trade was likely to remain vulnerable to political headlines, and price moves could be exacerbated by liquidity thinned by summer holidays in Europe, analysts said.
"I guess everybody is keeping their positions (minor) because we are seeing rollercoaster moves that nobody can explain," Charles Berry, trader at Landesbank Baden-Wuerttemberg said. "Volatility will be high, that's the only thing I can guarantee."
Bund futures were 35 ticks higher on the day at 143.30, having fallen more than 200 ticks at one point on Friday.
The ECB's conditional pledge suggests the situation in Spain may have to deteriorate and borrowing costs rise further before the country seeks aid, opening the door for ECB intervention, according to some analysts.
That backdrop could favor a sale of 10-year German debt on Wednesday, even if yields in the secondary market remain near historical lows.
Ten-year German bond yields were down 6.6 basis points at 1.36 percent - not too far from a record low of 1.126 percent hit in July.
"The sell-off on Friday was a little bit overdone," a second trader said. "People saw that as an opportunity to get long again."
Spanish borrowing costs over 10 years came off euro-era highs last week but held close to the 7 percent danger level. Prime Minister Mariano Rajoy signaled for the first time on Friday that he may seek a full-blown aid package but said he had not yet made a decision on the matter.
Spain has time to wait for clarity on what such aid would involve because it has already covered the majority of its debt needs for the year, Economy Minister Luis de Guindos said in a newspaper interview published on Sunday.
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