EURO GOVT-Bunds creep higher in tight ranges after healthy sale

Wed Apr 3, 2013 7:39am EDT

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* Investors on sidelines before ECB meeting on Thursday

* Five-year German auction meets solid demand

* Thin volumes exaggerate peripheral price move

By Ana Nicolaci da Costa

LONDON, April 3 (Reuters) - Bund futures crept higher on Wednesday after a solid German auction but stuck to tight ranges as investors refrained from putting on big bets before the European Central Bank's monetary policy meeting on Thursday.

A sale of five-year paper drew bids worth 1.9 times the amount allocated to investors, unchanged from a previous sale of similar paper in March, even though the yields on offer were lower this time around.

"Average yield continues to decline which is a reflection of the fact that investors are still prepared to put money into German government bonds despite the low yield," said Nick Stamenkovic, strategist at RIA Capital markets.

"That probably shows the ongoing niggling concerns about Cyprus and political uncertainty in Italy."

Lower-rated debt has proven resilient in the face of concerns over the bailout in Cyprus and Italy's struggle to form a government, but the low yield level on German bonds is a sign that there is still demand for safety, analysts said.

The yield on the five-year bond was little changed at 0.32 percent, while 10-year yields were also unchanged at 1.30 percent.

German Bund futures were up 8 ticks on the day at 145.32, trading in a tight 17 tick range on the day.

"Demand for Bunds remains strong and probably another factor here might be some speculation about the ECB given that there are some who are looking for a rate cut, and typically the five-year sector of the curve tends to outperform in such an environment," Michael Leister, rate strategist at Commerzbank said.

Analysts expected the ECB may take a more cautious tone on the economy, given recent data pointing to a grim economic outlook, but the central bank is widely expected to hold off reducing interest rates this month.

Surveys on Tuesday showed manufacturing across Europe's major economies endured another month of mostly deep decline in March.

But DZ Bank strategist Christian Lenk said the economy was expected to recover within the next two quarters and on that basis the five-year part of the curve was looking expensive.

"Especially in the belly of the curve, around the five-year seven-year (area), we expect a significant rise in yields," Lenk said. "For the Bobls (five-year German bonds) for example, we expect a rise in yields to 0.80 percent within about a quarter."

Despite the demand for safety, peripheral bonds outperformed other euro zone debt. Traders said liquidity was thin after the Easter holidays, exaggerating price moves.

Spanish 10-year government bond yields fell 6.6 basis points to 4.90 percent and the Italian equivalent eased 7 bps to 4.58 percent.

"It looks like risk is going back on despite the low level of Bund yields," said Robert Crossley, interest rate strategist at Citi.

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