LONDON: German government bonds edged lower in early trading on Thursday but investors were avoiding taking aggressive positions ahead of Spanish bond auctions and a European Central Bank policy meeting.

The ECB is expected to keep interest rates on hold at 1 percent and sound a more cautious tone on the euro zone growth outlook.

Ahead of the meeting in Barcelona, Spain will test market appetite for its debt for the first time since Standard & Poor's surprised markets last week by cutting the country's credit rating.

Borrowing costs are set to rise by more than a percentage point at the sale of three- and five-year bonds due to deepening concerns over its ability to meet fiscal targets and the health of the Spanish banking sector.

The relatively small target size of a maximum of 2.5 billion euros and 16 billion euros of Spanish redemption and coupon payments made on Monday will support the sale.

"There's no reason why it won't get done but there may not be aggressive bidding so we may see long tails," a trader said, referring to the difference between the average and the lowest accepted bid.

June Bund futures were 11 ticks lower at 141.62 after hitting record highs the previous day after data showing a decline in euro zone manufacturing.

Shorter-dated yields also hit record lows on Wednesday  and were holding near there in early trading.

"People are looking for slightly more dovish rhetoric from the ECB given recent data," the trader said.

"But I can't imagine we'll see a big sell off if they disappoint given all the other problems in the euro zone, it may just provide a buying opportunity."

Ten-year bond yields were flat at 1.616 percent.