German Bunds fall to six-week lows

German Bund futures fell to six-week lows and Spanish 10-year yields dipped today as some investors bet on more monetary stimulus from the US central bank and action to help shield Spain and Italy from more selling pressure.

Traders said mostly short-term investors were active in the market and the move might reverse soon, especially if a Spanish auction of short- and medium-term debt tomorrow disappoints.

The Federal Reserve concludes a two-day policy meeting later and the market has high expectations that it may extend its "Operation Twist" bond-buying programme that aims to push down long-term borrowing costs by selling short-term securities to buy longer-term ones.

Traders said the market was also expecting a dovish tone from the Fed, possibly signalling further easing in the future.

Safe-haven Bund futures were last 29 ticks lower at 141.07, having earlier hit a six-week low of 140.82. Ten-year German cash yields were 4 basis points higher at 1.57 per cent.

"The market is betting (Fed Chairman Ben) Bernanke would ride to the rescue here with some form of Fed magic," said Commerzbank interest rate strategist David Schnautz, adding that the break below the 50-day moving average in the Bund future around 141.55 accelerated the sell-off.

One trader said the prospect of Greece's pro-bailout parties forming a coalition later in the day and that a European agreement may soon be reached to rescue Spain's ailing banks were "bits and pieces giving a bid to the periphery".

A second trader said talk about the euro zone's rescue funds stepping in to buy Spanish and Italian debt was also supporting those bonds. The idea was put forward by Italy at a Group of 20 summit in Mexico yesterday.

This helped 10-year Spanish yields edge down. But they remained close to 7 per cent - a level closely watched by investors as Ireland and Portugal were eventually forced out of debt markets after their yields rose beyond there.

Spanish short-term bonds underperformed the rest of the curve before sales of 2014, 2015 and 2017 bonds tomorrow. Madrid paid its highest average cost since the launch of the euro to sell 12-month paper yesterday.

As investors believe more aid may be needed to solve Spain's problems than the agreed rescue package of up to €100 billion for its banks, every Spanish debt auction is seen as a cliffhanger.  "I don't know about this risk rally, we have a Spanish auction tomorrow," the second trader said.

Germany will sell up to €5 billion of two-year bonds later today, with the auction expected to find sufficient demand after a rise in yields in recent days. Two-year bonds yielded 0.089 per cent after starting the month in negative territory as investors flocked into German debt fearing the euro zone might collapse under the weight of its Greek and Spanish problems.

"The auction should be an easy exercise," Commerzbank's Schnautz said. "As the market makes more room (for the new bonds) we may actually touch 10 basis points, which these days is almost a bargain."

Reuters