Germany's services sector contracted unexpectedly in September and China's normally robust equivalent weakened sharply that month to its lowest point since November 2010. ID:nL3E8L30KQ]
The data, combined with comments by Spanish Prime Minister Mariano Rajoy as the trading session came to a close on Tuesday, underpinned safe-haven German bonds. Rajoy said a request for European aid was not imminent following a report the country could apply for help as soon as this weekend.
"We had some comments from the PM that a bailout wasn't imminent that knocked risk assets. A lot of the improvement we had seen in Spanish bonds yesterday was driven by overnight speculation that a bailout was imminent so any rebuttal of that had an impact," Brian Barry, fixed income analyst at Investec, said.
German Bund futures rose but the upside was limited with investors reluctant to take big bets before a European Central Bank meeting and a Spanish auction on Thursday, and key US data this week.
Bund futures rose 15 ticks to 141.59, pushing 10-year yields 1.2 basis points lower to 1.45 percent.
Ten-year Spanish government bond yields were little changed at 5.76 percent while borrowing costs over two years were flat at 3.21 percent.
Michael Leister, senior interest rate strategist at Commerzbank, said the market could take Spanish 10-year yields back to 6 percent as it tries to pressure Madrid into seeking financial help but would be reluctant to push them to 6.5-7 percent for fear of being caught off-guard by the ECB.
A Spanish bailout would likely trigger the ECB's plan to buy bonds of struggling countries to help bring borrowing costs to more sustainable levels.
"The market seems very much aware of this intervention risk. In this environment a lot of investors stay on the sidelines and are in wait and see mode," Leister added.
NAGGING GROWTH
Dwindling new orders and faster layoffs marked a worsening decline for euro zone companies last month, according to business surveys that dent hopes the economy will return to growth before 2013.
Investors would now look to US data this week for fresh insight into the health of the global economy. The ADP employment report later on Wednesday will be closely watched as a guide to Friday's non-farm payrolls employment number, which is expected to show that employers added 113,000 jobs in September.
More bad news on the growth front could give the December Bund contract further support and technical analysts were flagging Friday's high of 141.95 as the next key level on the upside.
"We are in consolidation mode within this current uptrend and that trend finds support at 141.12 and I would say whilst above that, the bias is for a break through the September high of 141.95 to test the August (contract) high of 142.62," technical analysts at Credit Suisse said.
Leister expected 10-year yields to be in a 1.40 to 1.80 percent range into the end of the year.