Bonds move cautiously

German two-year notes fell before this week's bond auctions and a report that may show an increase in European consumer prices.

The decline pushed the yield on benchmark security to within two basis points of Monday's two-month high.

Germany will sell €6 billion (Dh31.80bn) of 10-year bonds today and France will issue as much as €9bn of debt tomorrow.

The yield on the two-year note added two basis points to 1.37 per cent, after rising earlier to 1.38 percent. The 1.25 per cent security due on December 2011 fell 0.03, or 30 euro cents per €1,000 face amount, to 99.79.

The 10-year bund yield climbed one basis point to 3.40 per cent.

The European Union's statistics office may say prices in the 16-nation euro region rose an annual 0.9 per cent in December, compared with a 0.5 per cent increase in November, according to a survey.

"The market has to remain very cautious because it has to absorb massive supply," said Patrick Jacq, a senior fixed-income strategist at BNP Paribas in Paris.

US treasuries prices mostly rose, due to bargain-hunting in the wake of a recent selloff driven by optimism over an economic recovery and worries over the impact of heavy issuance of government debt.

Gains were limited, though, particularly in longer-dated debt, as those supply worries continued to overhang the market. Benchmark 10-year Treasury notes traded 3/32 higher in price with their yield easing to 3.83 per cent from 3.84 per cent.

Benchmark yields reached 3.918 per cent last week, the highest since early June after a steady stream of selling driven in part by the worries over the fallout from trillions of dollars of new debt expected to be issued by the government in an effort to prop up the economy.

There are risks of more upside surprises this week, especially in Friday's monthly US jobs report. But analysts say it might take a big positive in the payrolls number to renew the rout in bonds.

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