LONDON: Bund futures rose on Monday after a worse than expected German business sentiment survey and were likely to gain further in the near term as Spain's reluctance to seek a bailout unnerves investors.
The weak Ifo survey added to concerns the euro zone's largest economy was struggling as a result of the debt crisis, weakening the euro currency and increasing the appeal of safe- haven assets such as Bunds.
Sources with knowledge of the matter have told Reuters the Spanish government has been working on a series of reforms to be included in the budget bill later this week that would form the basis of a future aid deal.
But Economy Minister Luis de Guindos said on Saturday that his country would not rush to seek external help.
Seeking aid through the euro zone's rescue funds could allow the European Central Bank to buy Spanish bonds, lowering Madrid's borrowing costs. However, these costs have fallen sharply since the ECB plan was unveiled.
European officials also said they did not expect Spain to seek an assistance programme before a regional election in the Galicia region on Oct. 21. Paymaster Germany said on Friday that Spain did not need a European bailout.
"We've had some headlines over the weekend that Spain is close to a bailout, then we've had Spain saying they're not. Nothing's really certain, so for choice we're heading higher today," one trader said.
Bund futures were last 39 ticks higher on the day at 140.39. The trader said the lack of guidance from Spain on the timing of a future bailout may see Bund futures testing the upside of their recent 139.5-140.5 range.
DOWNGRADE THREAT
Spanish government bond yields were little changed on Monday, with investors choosing for now to express their concerns about the uncertainty in Spain in the more liquid safe haven German debt market.
A wrong bet on Spanish debt would be more costly as it would take more time to close a position in the thin Spanish market, which is dominated by domestic investors.
"It's a volumes problem in Spain, and the outlook is so binary that you'd rather stay out or stay neutral," another trader said.
The threat of a possible downgrade of Spain's credit rating into junk territory later this week by Moody's Investors Service also hangs over Madrid.
"That could contribute to the slight risk-off mood in the near term," said Elwin de Groot, senior market economist at Rabobank.
"But (sentiment) could change very quickly if they come up with a budget that includes structural measures because that would be a sign that they are preparing for a bailout request."
Traders said comments by Germany's deputy Finance Minister Steffen Kampeter there was discussion going in Europe about leveraging the euro zone's new permanent ESM bailout had capped the rise in Bunds before the Ifo release.
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