German Bund yields inch higher before Fed minutes
By Marius Zaharia LONDON, Aug 21 (Reuters) - German bond yields rose slightly on Wednesday, with the market trading in narrow ranges before the release of minutes of the Federal Reserve's July meeting. A German two-year auction went smoothly and had limited impact on markets focused mainly on the Fed outlook. The minutes will be perused for hints on the timing and scale of cuts in U.S. monetary stimulus, uncertainty over which has generated volatility across financial markets. After rising to their highest since March 2012 on Monday as markets increasingly bet the Fed would move as early as next month, German 10-year yields retreated on Tuesday. The same expectations have caused outflows in emerging markets, with some of the money eventually finding its way back into German debt. On Wednesday, markets were calmer, with Bund futures down 20 ticks to 140.41, versus 2013 lows of 139.71 hit on Monday. Ten-year Bund yields rose 2 basis points to 1.86 percent, off Monday's highs of 1.924 percent. Analysts and traders said that, with yields close to 2013 highs, markets were positioned for the Fed minutes to show a scaling back of stimulus was imminent. "We do not expect much new guidance from the minutes so the risk is that we see a bit lower yields in U.S. Treasuries and Bunds," said DZ Bank strategist Christian Lenk, adding that he saw more chances for Bund yields to fall to 1.70 percent than rise to 2 percent later this year. He said any rise in yields if minutes do offer more clear guidance was likely to be limited by the safe-haven appeal of Bunds, which was enhanced by the sell-off in emerging markets. Indian, Indonesian and other markets tumbled on Tuesday in anticipation of reduced Fed asset purchases. "If the turmoil continues and we see signs central banks there are forced to raise rates, that will be a factor weighing on global growth and...(setting) a natural boundary for U.S. and German rates," Rabobank market economist Elwin de Groot said. SMOOTH AUCTION Germany sold just over 4 billion euros of new two-year debt. Although the 0.23 percent average yield was more than three times that of July's auction, demand as measured by the bid/cover ratio was only 1.8, down from 2 at the previous sale and below a 1.9 average for sales of similarly-dated paper this year. Bunds traded slightly lower after the sale, but traders warned against attributing the weakness to the auction results and said low volumes exacerbated price moves. Two-year yields rose 1 bp to 0.22 percent. "The auction went reasonably O.K. given we're in a quiet market," one trader said. "We're going to be stuck in a range from now on ... The minutes could have a big impact in low volumes." Other euro zone bond yields were also slightly higher as the prospect of lower central bank liquidity hit both low-risk and higher-yielding assets.
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