* German bonds extend sell-off, multiple factors cited
* Italian yields rise before Thursday's debt auction
* Contagion fears could make Italian sale challenging
By Ana Nicolaci da Costa
LONDON, June 13 German bond prices fell on
Wednesday extending a two-day sell-off helped by profit-taking,
even as decent demand at a 10-year bond auction underscored the
debt's safe-haven appeal before Greek elections this weekend.
Italian government bonds also came under pressure one day
before The Treasury offers three-year bonds and two longer-dated
issues no longer sold on a regular basis, for a total of up to
4.5 billion euros.
The Italian auction may be a challenge at a time when
analysts are worried about contagion from Spain. A bailout
agreed for Spanish banks did little to soothe concerns that it
may eventually lose access to commercial markets.
"Tomorrow's auction will be under the spotlight. The market
is (watching) to see how much room there is for the Italian
Treasury to fund the current budget," Sergio Capaldi, strategist
at Intesa SanPaolo. "They know that they have to pay a tad more
to get market demand."
Italian 10-year government bond yields by late
European trading stood 5.3 basis points higher at 6.22 percent,
reversing earlier falls as nerves set in before the bond sale,
according to traders.
The Spanish equivalent at 6.77 percent hovered
near euro-era highs and were up 2.7 bps on the day.
German Bund future saw another day of heavy
selling, despite widespread uncertainty before Greece's election
over the weekend and decent demand at a German auction earlier
in the day. It saw a settlement close of 141.71, down 77 ticks
on the day.
Analysts have been scratching their heads to explain the
move lower in the Bund, with some pointing to profit-taking on
hefty gains made recently and others to a bout of long-dated
supply from highly-rated Austria, the Netherlands and the
European Financial Stability Fund.
German Bund futures in May locked in 3.5 percent of gains
after a vote in Greece resulted in political deadlock and as
concerns over Spain's ability to recapitalize banks without
running out of funds grew. The Bund is up 2 percent so far this
year after an 11 percent rally in 2011.
Traders also pointed to changes in Danish pension fund rules
as an additional technical factor reducing demand for
longer-dated German debt.
The losses however have prompted some to wonder whether
contagion is finally spreading to Germany on the view that it
will pay a high price for whatever the outcome of the euro zone
While demand at a sale of 10-year German debt helped ease
tentative worries about the regional powerhouse's credit
quality, some analysts said the debt sale could have been better
given how much prices had cheapened ahead of time.
"They built one of the biggest concessions we have ever seen
for a 10-year auction," said Marc Ostwald, strategist at
Monument Securities. "It's been a lot better than some of the
really bad 10-year auctions that we've had, but 1.4 ... is
hardly overwhelming given the size of the concession."
But, for now, analysts expected safe-haven Bunds to rebound
and continue to benefit from an uncertain backdrop, especially
before the Greek vote on Sunday.
If Greek voters once again vote out parties in favor of
austerity in exchange for bailout cash, the country could
quickly run out of funds and could come under pressure to leave
A euro zone break up would have unmeasurable consequences
for other member states including the biggest economy, Germany,
whose export-led economy greatly benefited from the single
Those concerns are likely to make investors reluctant to
take the Bund sell-off much further, some said.
Ten-year German bond yields rose 7.1 bps to
1.50 percent, off but still within sight of historical lows of
"Certainly fundamentals don't justify the current level of
low yields but we rule out that markets have shifted to a
sustainable sell-off mode," Annalisa Piazza, market economist,
Newedge Strategy said. "
"Uncertainties about details of the Spanish banks loan and
the outcome of the Greek elections are still looming."