April 11, 2012 / 6:17 AM / 5 years ago

EURO GOVT-German auction curbs Bund rally, Spain still in focus

LONDON, April 11 (Reuters) - Safe-haven Bund futures edged lower on Wednesday as an upcoming German debt auction cooled demand, but concerns about Spain still dominated investor sentiment and underpinned demand for low-risk assets.

Bund futures fell 13 ticks to 140.19 but remained within sight of the all-time high of 140.52 after a sharp rally in the previous session. German 10-year yields rose 1 basis point to 1.65 percent, close to the record low of 1.637 percent.

Attention will be centred on Spanish debt as investors appear to be losing confidence that Madrid can exercise the fiscal discipline needed to control public finances, with a faltering global growth outlook adding to the task.

"There can be no question that sentiment has turned sour and that the highly indebted eurozone countries are firmly back in focus," analysts at interdealer broker Tradition said in a note.

"This time it is not so much that investors hadn't priced in the debt problems as much as it is the sluggish response of the euro zone economy to the structural reforms being implemented."

However, with German yields at rock-bottom levels, the launch of a new 10-year bond later in the session will also be closely watched for any sign that a low return on investment is deterring buyers.

Societe Generale analysts expected the auction to fare better than the launch of the previous Bund in November last year which drew extremely weak demand at a time when yields were also near record lows.

"In contrast to today, that poor auction came on the heels of several weak auctions, with little cover. Similar weakness should not be seen this time round, with the market now familiar with sub-2 percent Bund yields," the bank said in a note.

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