German yields rise as investors look to Fed minutes
By Marius Zaharia and Ana Nicolaci da Costa LONDON, Aug 21 (Reuters) - German bond yields rose on Wednesday as investors looked to the release of minutes from the Federal Reserve's July meeting for direction in quiet, summer trading. Bets the U.S. central bank may curb bond purchases as early as next month drove 10-year yields to their highest since March 2012 on Monday and they have stabilized just below those levels. A German two-year auction went smoothly and had limited impact on markets focused mainly on the Fed outlook. The minutes will be scoured for hints on the timing and scale of cuts in U.S. monetary stimulus, uncertainty over which has generated volatility across financial markets. German Bund futures settled 47 ticks lower at 140.14. Ten-year yields rose 4 basis points to 1.88 percent. Analysts and traders said the fact that yields remained near 2013 highs of 1.924 percent showed 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. "(It's) probably just nervousness ahead of the (Fed), definitely not helped by strong data," one trader said, explaining market moves. U.S. home resales rose in July to their highest level in over three years. 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. Two-year yields were 1.1 bps higher at 0.22 percent. "The auction went reasonably O.K. given we're in a quiet market," one trader said. "...The minutes could have a big impact in low volumes." Other euro zone bond yields were also higher as the prospect of lower central bank liquidity hit both low-risk and higher-yielding assets. Greek debt underperformed, with ten-year yields up 11 basis points at 10.19 percent. They hit their highest in three weeks on Tuesday after German Finance Minister Wolfang Schaeuble said Athens would need a third bailout and would get no more debt haircuts. On Wednesday, the European Central Bank and German officials sought to play down this. "At the end of the day... if there is debt forgiveness, i.e. if there is some sort of official sector haircut or debt relief, then that boosts the value of Greek debt and if there is not, then potentially the risks increase," the trader said.