Bunds dip but supported by growth, policy concerns

Later in the session, data on European Central Bank bond buying will be closely watched for signs of commitment to keeping Italian and Spanish yields at sustainable levels.

Having risen more than two full points to record highs last week, and with little economic data due for release in the session, Bunds succumbed to some short-term profit taking in thin markets as equities rallied.

Nevertheless, the backdrop remained supportive for safe-haven German debt and buying was expected to emerge on dips, keeping the contract poised to set new highs if data due later this week confirmed worries about a weaker euro zone economy.

"Clearly the uncertain global outlook and the worry about lack of policy response in Europe is keeping investors in the safety of German government bonds," said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh.

Germany maintained its opposition towards issuing a common euro zone bond -- favoured by many as a lasting solution to the debt crisis -- and the ECB's Ewald Nowotny raised the prospect of delays to the planned expansion of the region's rescue fund.

Both factors kept investors in risk-averse mood.

"The market is already assuming that there are further delays (to the rescue fund expansion) but it might be a bit unnerving to see a policymaker speaking along those lines," said Peter Chatwell, rate strategist at Credit Agricole.

Ten-year Bund yields sank to a record low last week of 2.028 percent and analysts said data due later in the week could provide fresh impetus for another drop.

Yields on 10-year debt were 2.12 percent, up 1.3 basis points, while two-year yields rose 2 bps to 0.641 percent.

ECB DATA IN FOCUS

The day's focus was set to fall on data on ECB purchases last week of bonds issued by the region's highly indebted peripheral states.

After announcing a record 22 billion euros of purchases a week ago, the market will be keen to gauge the cost of maintaining Italian and Spanish yields around 5 percent.

This week's figure was expected to show a decline in purchases but any sign the ECB's support was lower than expected could prompt concerns abut the bank's long-term commitment to supporting the two systemically important sovereigns.

"If there's any sign that the ECB is turning more reluctant or that their buying is starting to slow, that provides investors with an opportunity to come in and short Italy and Spain," Stamenkovic said.

Monday's data calendar offered little in the way of further clues on the health of the currency bloc's economy, with the market instead look ahead to purchasing managers' index and sentiment survey results due on Tuesday.

"We look for the majority of the leading indicators to have taken a plunge in August...Fears are mounting that the recovery might come to an abrupt end, not least substantiated by the collapse in some US business surveys," Commerzbank strategists said in a note.

Market participants were also looking to Friday's speech by Federal Reserve Chairman Ben Bernanke in Jackson Hole, Wyoming for any sign the US central bank will adjust monetary policy to tackle recent financial market turmoil and slowing growth.

Copyright Reuters, 2011