Ten-year bund yields were within six basis points of the highest in more than two weeks amid speculation the European Central Bank will late last night signal its intention to raise interest rates next month.
Greek bonds fell for a third day as Europe's policymakers clashed over how to fix the nation's debt crisis.
The ECB is forecast to leave its benchmark rate at 1.25 per cent, according to a Bloomberg survey of economists. ECB President Jean-Claude Trichet will hold a press conference late last night.
"Rates on hold isn't going to surprise people and the market will take that in its stride," said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London.
"It's all down to the press conference where we will get confirmation about whether the ECB will raise rates in July. We are looking for Trichet to be hawkish."
The 10-year bund yields was two basis points lower at 3.04 per cent as of 10:18am in London. It climbed to 3.10 per cent on June 7, the highest since May 20. The 3.25 per cent security due in July 2021 traded at 101.795.
Yields on two-year notes were little changed at 1.68 per cent. They reached 1.72 per cent on June 7, the most since May 24.
Trichet may pave the way for a rate increase in July by calling for "strong vigilance" on price pressures during his news conference. The ECB in April raised borrowing costs from a record low for the first time in almost three years to fight inflation threats. European consumer prices slowed to 2.7 per cent in May, from 2.8 per cent the previous month.
The central bank will publish its latest economic forecasts for this year and next.
The latest phase of the Greek-debt crisis risks exacerbating tensions between the ECB and the German government.
While German Finance Minister Wolfgang Schaeuble said in a letter published that bondholders should contribute to part of a second Greek bailout plan, the ECB argues that such a step could spark a new wave of financial turmoil and insists it's ready to press on with raising rates.
"If Trichet signals strong vigilance, the probability for a rate hike in July will increase and that will be a small negative for bunds," said Christopher Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt.
"There are many issues at play today. For bunds, Trichet's stance on Greece will also be important and if he signals there's a rift between the ECB and German policy makers then that could support bunds on a safety bid."
From / Gulf News