LONDON, April 27 German government bonds rallied
early on Friday as demand for low-risk assets increased after
Standard and Poor's cut Spain's credit rating, ramping up
worries about debt from the euro zone's struggling southern
members ahead of an Italian bond auction.
The Bund future rose 34 ticks to 141.26, closing in
on a record high of 141.37 set at the start of the week. Demand
was expected to remain strong into the weekend as sentiment
sours against the region's weaker states.
"People have seen this coming but I expect there will still
be a bit of a panic bid... this has got to be good for Bunds," a
London-based bond trader said.
Spain's credit rating was cut by two notches to BBB-plus,
with S&P citing the expected deterioration of government
The blow to already-fragile investor sentiment comes ahead
of an Italian auction of 6.25 billion euros of government bonds
and was likely to add to the upward pressure on yields already
anticipated due to the sale.
While the auction was still expected to see bidders turn up,
borrowing costs were expected to be higher than at previous
sales, reflecting the weakness in secondary markets over the
Analysts said the movements in prices before and after the
auction would be the best gauge of whether long-term investors,
who typically hold bonds to maturity and are a key source of
funds for highly-indebted countries, were willing to back Italy.