EURO GOVT-Bunds edge up before German debt sale

LONDON Wed Feb 6, 2013 2:07am EST

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LONDON Feb 6 (Reuters) - Bund futures edged up on Wednesday before a sale of five-year German debt that is expected to find strong demand due to a recent rise in yields and political uncertainty in Spain and Italy.

Italian and Spanish bonds reversed on Tuesday some of the losses made at the start of the week on the back of corruption allegations in Spain that put Prime Minister Mariano Rajoy under pressure and an increasingly uncertain outcome in Italian elections later in February.

Better-than-expected data brought back some optimism about the euro zone, but lower-rated debt and safe-haven Bunds are bracing for a volatile period ahead, traders said.

"There are fairly ominous signs (in the periphery). I know they (Italian and Spanish bonds) had a good day yesterday, but there's Spanish supply coming up," one trader said.

At 0703 GMT, Bund futures were 7 ticks higher at 142.27.

Germany plans to sell up to 4 billion euros of debt later in the day.

Five-year yields have more than doubled to about 0.7 percent in 2013 on bets that the excess liquidity in the banking system may shrink faster than initially thought as banks repay vast amounts of long-term emergency loans to the European Central Bank, which meets on Thursday.

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