Bunds dip before auction but solid sale expected

Bunds have settled into a well-defined range since overcoming a sell-off at the start of this year when investors poured cash into high-yielding markets like Italy and Spain.

Traders say European investors are not prepared to go out on a limb in either direction in the days remaining to the Italian polls on Feb. 24-25. But a positive overnight performance for share markets put safe-haven Bunds on the back foot.

"All in all it makes sense to see the Bund in a tight range at the moment, perhaps with some concession ahead of the auction weighing today," said BNP Paribas rate strategist Patrick Jacq.

German Bund futures fell 25 ticks to 142.57, but remained well within the 143 to 142 range that has limited price moves for the last two weeks and dealers said the auction should draw healthy demand. Results are due at 1030 GMT.

"I think the auction will go relatively well. Outright the Bund can be considered expensive but relative to Treasuries, peripherals and in asset swap terms it's not that expensive," Jacq said.

Despite worries that Italy may end up with a fragmented parliament and less focus on reform, its bond yields were slightly lower on the day, continuing a pattern of confident buyers emerging to take advantage of price dips.

Ten-year Italian yields were 2 basis points lower at 3.39 percent.

DZ Bank said shorter-dated Italian bonds looked attractive at the moment as overall market sentiment improved and in anticipation of a fresh rally if former Prime Minister Silvio Berlusconi's election campaign ends in defeat.