* Demand seen tepid at German 5-year bond sale
* German sale follows "technically failed" 30-year auction
* Italian, Spanish yields outperform top-rated bonds
By Emelia Sithole-Matarise
LONDON, March 5 Bunds slipped on Wednesday
before a sale of German five-year debt that some market
participants see drawing tepid demand after a sharp rally over
the past month.
The sale of up to 4 billion euros of five-year paper follows
a 30-year German bond auction last week which was shunned by
investors due to its low potential returns, and 10-year debt
sale the week before met similarly poor appetite.
Demand may also be sapped by increased risk-taking ahead of
talks between the United States and Russia on easing tensions
over Ukraine and on caution before a European Central Bank
meeting on Thursday which might see monetary policy unchanged.
Five-year German bonds are particularly sensitive to shifts
in expectations on monetary policy and money market prices
suggest little chance of further easing from the ECB this week
after slightly forecast-beating inflation data last week.
"I don't expect there to be huge demand at the auction. The
five-year is trading quite rich and after recent developments on
inflation, the chance the ECB will cut rates this week has
diminished," ING strategist Alessandro Giansanti said.
"German Bunds rallied due to the recent volatility that was
due to political reasons but I expect after the easing of
geopolitical tensions demand is cooling," he said.
German 10-year yields, the benchmark for euro
zone borrowing costs, was up 2 basis points at 1.61 percent
while five-year bonds yielded 1 basis point more than the
previous day at 0.64 percent in the secondary
Many in the market, however, expect the ECB to loosen policy
later this year to support a nascent euro zone recovery and as
inflation is predicted to stay way below the central bank's
target of below but close to 2 percent.
Italian and Spanish bonds extended their outperformance of
top-rated bonds which has pushed their yields to eight and
8-1/2-year lows respectively this week.
Recent strains in emerging markets (EM) have also fed the
bond rally, underpinned by signs of recovery in the euro zone
and the ECB's pledge to buy government bonds, albeit under
strict conditions, if a euro zone country gets into trouble.
"We continue to see scope for it (EM crisis) proving
positive for peripherals as investors wanting to shift out of EM
look for 'relative' safety while giving up as little yield as
possible," Rabobank strategist Richard McGuire said.
Spanish and Italian 10-year yields slipped 2 bps to 3.43
percent and 3.40 percent