* Investors on sidelines before ECB meeting on Thursday
* Five-year German auction meets solid demand
* Thin volumes exaggerate peripheral price move
By Ana Nicolaci da Costa
LONDON, April 3 Bund futures crept higher on
Wednesday after a solid German auction but stuck to tight ranges
as investors refrained from putting on big bets before the
European Central Bank's monetary policy meeting on Thursday.
A sale of five-year paper drew bids worth 1.9 times the
amount allocated to investors, unchanged from a previous sale of
similar paper in March, even though the yields on offer were
lower this time around.
"Average yield continues to decline which is a reflection of
the fact that investors are still prepared to put money into
German government bonds despite the low yield," said Nick
Stamenkovic, strategist at RIA Capital markets.
"That probably shows the ongoing niggling concerns about
Cyprus and political uncertainty in Italy."
Lower-rated debt has proven resilient in the face of
concerns over the bailout in Cyprus and Italy's struggle to form
a government, but the low yield level on German bonds is a sign
that there is still demand for safety, analysts said.
The yield on the five-year bond was little
changed at 0.32 percent, while 10-year yields were
also unchanged at 1.30 percent.
German Bund futures were up 8 ticks on the day at
145.32, trading in a tight 17 tick range on the day.
"Demand for Bunds remains strong and probably another factor
here might be some speculation about the ECB given that there
are some who are looking for a rate cut, and typically the
five-year sector of the curve tends to outperform in such an
environment," Michael Leister, rate strategist at Commerzbank
Analysts expected the ECB may take a more cautious tone on
the economy, given recent data pointing to a grim economic
outlook, but the central bank is widely expected to hold off
reducing interest rates this month.
Surveys on Tuesday showed manufacturing across Europe's
major economies endured another month of mostly deep decline in
But DZ Bank strategist Christian Lenk said the economy was
expected to recover within the next two quarters and on that
basis the five-year part of the curve was looking expensive.
"Especially in the belly of the curve, around the five-year
seven-year (area), we expect a significant rise in yields," Lenk
said. "For the Bobls (five-year German bonds) for example, we
expect a rise in yields to 0.80 percent within about a quarter."
Despite the demand for safety, peripheral bonds outperformed
other euro zone debt. Traders said liquidity was thin after the
Easter holidays, exaggerating price moves.
Spanish 10-year government bond yields fell
6.6 basis points to 4.90 percent and the Italian equivalent
eased 7 bps to 4.58 percent.
"It looks like risk is going back on despite the low level
of Bund yields," said Robert Crossley, interest rate strategist