LONDON: Bund futures fell on Tuesday after German and French data showed the euro zone's two leading economies withstood a contraction in the currency bloc in the second quarter, but doubts over latest efforts to stem the debt crisis capped losses.
Seasonally adjusted data showed German gross domestic product grew 0.3 percent in the second quarter on the back of solid exports and consumption. Earlier, figures showed French GDP was static in the second quarter, confounding expectations of a contraction against the backdrop of a shrinking euro zone economy.
Although German ZEW economic sentiment data was worse than expected, signalling that Europe's economic powerhouse could come under pressure in coming quarters, the slightly upbeat growth numbers prompted some profit-taking in low risk Bunds.
"The market moved on the German and French GDP but the fact that there was no growth in France I don't think is something to rejoice about. There're still risks to growth," a trader said.
Bund futures were last down 32 ticks at 142.86 with German 10-year yields 2.8 basis points higher at 1.43 percent , in the middle of the 1.126-1.6 percent range they have been hemmed in since early July.
Traders and strategists saw little scope for them to break out of that range before September, when financial markets expect the European Central Bank to give details about plans to intervene in markets to contain Spain and Italy's borrowing costs.
"There's not much flow going through the market so it doesn't take much to move it. But we're still in a bit of a limbo waiting to see what happens with the ECB, Germany and the ESM (rescue fund)," the same trader said.
ECB QUESTIONS
Spanish and Italian yields were broadly flat, having risen in recent days as investors worried about the conditions that needed to be met before the ECB could start buying bonds.
The ECB signalled last month it could start buying short-dated Spanish and Italian debt, but only if troubled countries were willing to formally ask for aid from the euro zone's EFSF/ESM rescue funds and accept some degree of fiscal supervision. That is something that Spain has so far resisted.
Investors are also keen for detail on how much and the exact maturities the ECB would target.
"We still want to know how much is the ECB willing to provide even without the country specifically asking for aid. How are they going to do it?" said Elisabeth Afseth, a strategist at Investec.
"If that appears to be fairly generous, that the amount they are willing to buy is substantial, it might again push front yields lower and allow Spain to get a couple of auctions through and delay the need to request a full bailout."
This would trigger further steepening in Spanish and Italian curves as investors position for shorter-dated bonds to outperform longer maturities.
Spanish two-year yields were flat at 4.25 percent , having risen almost a point from a low of 3.2 percent plumbed on Aug. 7 in the wake of the ECB's comments. Equivalent Italian yields were 3 bps lower at 3.51 percent.
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