Bund futures edged lower on Thursday as euro zone leaders showed signs of their determination to see out Greece's debt problems without it leaving the single currency, prompting some to trim positions in safe-haven bonds.
German and French leaders said after a conference call with Greek Prime Minister George Papandreou on Wednesday that they were determined to keep Greece in the euro.
There was no clear sign from them that a stalemate over Athens next bailout payment had been broken but officials in Greece and Germany were optimistic that EU and IMF inspectors would now take a positive view of latest Greek austerity efforts.
We have had some constructive comments from politicians... this has offered markets some support, so we are in a process of stabilisation in a wide range as volatility remains high and stress remains very elevated, said Patrick Jacq, strategist at BNP Paribas in Paris.
Bund futures FGBLc1 were 20 ticks lower at 136.67, continuing to fall back from recent record highs after shedding more than three-quarters of a point on Wednesday.
I still don't think anything has changed underneath, but in these markets pullbacks can be quite aggressive and so we might see more pressure today on a combination of supply and risk-on feeling, the trader said.
Technical charts showed support for the contract at 136.52, the 38 percent retracement of the September recovery, and the expectation was for further price strength while this level remained intact, said UBS technical analyst Richard Adcock. The contract has tested this support three times in the last week.
Globally, riskier assets benefited from the slight improvement in sentiment over the euro zone crisis with stocks rebounding and safe-haven gold falling.
German 10-year yields were flat at 1.866 percent, underperforming U.S. Treasuries and continuing to narrow the spread between Bunds and higher yielding U.S. paper.
The 10-year U.S./German spread last stood at 13 basis points having narrowed steadily since Wednesday from more than 20 bps.
Spain will later test investor appetite for its bonds with a sale of up to 4 billion euros of debt. That is expected to be sold at yields around 5 percent across all three lines being tapped -- roughly the highest level since 2002.
Spain currently has the benefit of support from the European Central Bank which has been buying its bonds in the secondary market to stem rising yields.
All three bonds on offer, two lines maturing in 2020 and one in 2019, were within the scope of the ECB's recent purchases, giving dealers an incentive to bid at the auction, analysts said.
However, a weak auction would exacerbate fears that long-term investors were no longer willing to buy debt issued by the sovereign, leading to renewed demand for safe-haven Bunds.
We do not look for an accident, but nervousness remains high, said Commerzbank strategist Rainer Guntermann in a note.
France will also issue debt later in the session, selling nominal and inflation-linked bonds worth up to 9.8 billion euros.