LONDON Germany is the only euro zone country next week to issue bonds, providing sovereign debt markets with a much-needed breather after a turbulent week.
The European Central Bank President Mario Draghi backed his pledges to preserve the euro with promises for eventual bond-purchases but only if governments activated the euro zone's bailout funds to join the ECB in buying bonds.
The comments have provided respite to Italian and Spanish bonds but peripheral debt markets could remain volatile in the absence of any imminent policy action.
This backdrop could favor a 10-year German debt sale on Wednesday in a quiet week for supply, even as yields in the secondary market are still ultra-low, analysts said.
"The ECB provided relief to peripheral markets but at the same time tensions there will have to intensify first before we get to a program and the next policy response," Rainer Guntermann, strategist at Commerzbank said.
"Overall, there should be decent demand for this auction of German paper but ultimately the sentiment on the day will determine the results."
Germany is due to sell 4 billion euros of July 2022 bonds on Wednesday.
A similar sale in July attracted bids worth 1.5 times the amount on offer and saw an average yield of 1.31 percent - the lowest ever on record for the maturity.
"Those German auctions are very difficult to call, I wouldn't like to give a very strong opinion, it depends on what happens in the past 24 hours," said David Keeble, global head of fixed income strategy at Credit Agricole in New York.
Investors would have to weigh appetite for safety with relatively low yields. While 10-year yields in the secondary market were off record lows of 1.126 percent, they were still at historically low levels.
"I personally wouldn't touch German yields here, they are way too low," Keeble added.
A sale of 30-year paper in late July was undermined by Moody's revision of Germany's ratings outlook to negative, citing escalating costs of the debt crisis for core euro zone states.
Poor returns along with a growing view that Germany will pay a high price no matter the outcome of the debt crisis have also prompted some investors recently to seek a pick-up over Bunds in other highly rated but also higher-yielding markets.
But Norbert Aul, strategist at RBC Capital markets said there was little alternative to German Bunds for an investor who wants to invest in high-quality euro-denominated bonds.
"The Netherlands, Finland or France, are not necessarily a huge alternative ... because burden-sharing will also extend to these countries," Aul said.
"In the current market environment, we could well set a new record low yield (at the auction)."
(Additional Reporting by Marius Zaharia; editing by Ron Askew)