EURO GOVT-Bunds drift lower before German, French auctions

Wed Oct 31, 2012 4:55am EDT

Related Topics

* Bunds drift down before longer-dated supply

* Germany to sell 2 bln euros of 2044 bonds

* France to sell 7.5 bln euros of paper

By Kirsten Donovan

LONDON, Oct 31 (Reuters) - German government bonds slipped on Wednesday before longer-dated auctions from Germany and France as traders braced to absorb the supply, though they expected Bunds to rally later on month-end position adjustment.

Although both sales are expected to go well, traders tend to try to cheapen the paper before auctions as they make room for it on their books, leading to weakness in secondary markets.

Germany will sell 2 billion euros of July 2044 bonds -- its last planned sale of ultra-long debt this year -- after demand for German safe-haven paper picked up at a 10-year sale last week.

Before that France will sell up to 7.5 billion euros of bonds maturing in 2019, 2022 and 2035.

German Bund futures were 18 ticks lower at 141.34, having failed to break above resistance at 142.00 on Tuesday.

"We're just drifting lower before the auctions," a trader said.

"We expect it to be a volatile day before Bunds, and especially France, see a positive end to the month and the auctions well subscribed. But the dealers who are going to take down that supply aren't going to be pushing the market up just yet."

Commerzbank rate strategists said in a note that the difference in yields between 30-year and 10-year German Bunds could narrow after the auction, heading back towards 80 basis points from around 85.

"Going out of today's supply we could well imagine a correction...also given that 10-year yields appear vulnerable after their recent rally on the back of hurricane Sandy and potentially stronger macro data in the wings towards the end of the week."

U.S. markets will reopen on Wednesday, possibly adding to volatility as players position for the end of the month, after the giant storm Sandy closed much of New York's financial district for two days.

"We've not really had any negative surprises this week in terms of Italy, where yesterday's auction went OK, and Spain, to dampen down market confidence and there's maybe also an element of relief that U.S. markets will reopen today," said Credit Agricole rate strategist Orlando Green, when asked about the fall in safe-haven German paper.

But uncertainty over when Spain may request financial assistance - enabling the European Central Bank to buy its bonds - and political wrangling in Greece over unpopular austerity measures necessary to secure more aid is expected to stem any selling pressure in lower-risk government bonds.

German 10-year government bond yields were 2 basis points higher at 1.50 percent.

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