EURO GOVT-Bunds steady as investors await German auction
* Decent demand seen at 5-year sale * Bunds fall at open; upbeat start to U.S. earnings lifts stocks * Supply is showing demand for safety remains By Ana Nicolaci da Costa LONDON, Jan 9 (Reuters) - German Bund futures were little changed on Wednesday as investors looked to a German auction to gauge demand for safe-haven assets, and analysts saw further room for a Bund recovery after last week's sell-off. The market awaited the 5 billion euro sale of February 2018 bonds, with analysts expecting the rise in the five-year Bund yield since the start of the year to help entice investors even though German debt still offers only meager returns. German Bund futures were 4 ticks lower at 143.39 but analysts saw room for a rise after the contract posted its biggest weekly loss since September last week. "There were oversold conditions for the Bund market and the market should again become more neutral. When it is oversold there is a tendency for the market to move slightly higher," said Piet Lammens, strategist at KBC, adding there was key resistance for the Bund first at 143.75 and then at 143.92. "If we would move sustainably beyond these two levels the picture might become more bullish for the Bund." At the German auction, investors would have to weigh low returns with the safety offered by Bunds against a fragile economic backdrop. Auctions in Austria and the Netherlands on Tuesday showed there is still ample demand for higher-rated euro zone debt. "I think that (the Bund sale) will go well. There seems to be a lot of central bank demand for the new five-year," one trader said. Five-year German yields were little changed at 0.48 percent, up from 0.34 percent at the beginning of the year. Ten-year yields were flat at 1.50 percent. "We seem to be holding the 1.50 level, which is obviously a key support level - (around) the upper end of recent trading range," Nick Stamenkovic, strategist at RIA Capital Markets said. German Bunds opened lower as European shares were supported by Alcoa's results. The largest aluminum producer in the United States said late on Tuesday it was optimistic demand for the metal would continue to grow in 2013, as it posted in-line profit and beat expectations on revenue. SPAIN IN FOCUS Demand at bond sales from the Netherlands and Austria in the previous session show investors remain keen to hold safer euro zone assets even as the pick-up offered by Italian and Spanish bonds, combined with the promise of central bank intervention, has lured them back into those markets. Ten-year Spanish bond yields were 2 basis points higher at 5.10 percent but short-dated ones were broadly steady one day before the country holds its first debt auction of the year. Madrid unveiled a sizeable 121 billion euro gross funding target for the year on Tuesday - a 7.6 percent increase on the amount it raised in 2012 that highlights the country's economic plight. Spain's ability to raise funds in the market will be key in determining whether it will be forced to seek financial aid this year - a precondition for purchases of its bonds by the European central Bank. The mere promise that the ECB will buy bonds of countries that ask for help has been enough to trigger a sharp drop in Spanish and Italian yields in recent months but some analysts say the pressure will eventually mount. "Implicit in our view is that Spain will at some point make an official request for aid to cement the progress that has been made and also the drop in yields," Elwin de Groot, senior market economist at Rabobank said. "You can argue that because the yields have fallen already to such an extent, the pressure on the Spanish government is much lower to do so but at the same time they know this is a fragile equilibrium."
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