* Bunds edge lower before Thursday's ECB meeting
* Uncertainty to keep investors sidelined
* Belgium kicks off week's bond auctions
By Kirsten Donovan
LONDON, Sept 3 German government bonds edged
down on Monday, with investors likely to stay cautious before a
European Central Bank meeting at which expectations are high
that details of a bond buying plan will be fleshed out.
Shorter-dated Spanish bond yields fell in thin
trading with traders reporting hedge funds buying in small
amounts before Thursday's meeting.
Whether falls in Spanish and Italian bond yields can be
sustained depends on the fine print of the scheme, which is
intended to cut borrowing costs.
ECB President Mario Draghi skipped a weekend meeting of
global central bankers to try to smooth over a deep rift within
the ECB over the proposals.
"It's difficult for the ECB to do anything dramatic on
Thursday, but they've got to give the impression they're willing
to," said ING rate strategist Padhraic Garvey.
"The market is being more realistic as the days go by...so
there shouldn't be too much disappointment."
Deutsche Bank estimates that 180-200 billion euros of ECB
purchases are priced into bond markets, seeing little potential
for further rallies in shorter-dated Spanish and Italian debt,
which is where the central bank is expected to focus its buying.
Instead, it says private sector buying in the five-year area
could help those bonds rally and recommends a trade betting on a
steepening of the Italian yield curve between the five- and
Spanish 10-year yields were 4 basis points
lower at 6.87 percent, having retraced around half the falls
seen since late July, when the ECB indicated it could take
"There's a feeling that something has to come out," a trader
The prospect of ECB intervention is expected to help a
Spanish bond auction on Thursday - the first test of demand for
Spain's bonds since early August. It will sell debt with
maturities of up to four years.
Prime Minister Mariano Rajoy said in interviews with
European newspapers published over the weekend Spain would
consider seeking extra aid but did not see any need for new
ECB President Mario Draghi said after the bank's last policy
meeting in early August it would only consider buying bonds if
governments requested aid via the euro zone's bailout funds.
September Bund futures were 11 ticks lower at
143.91, having retraced around 60 percent of their losses since
late July, reflecting the uncertainty heading into the ECB
meeting this week.
"If we get closer to 144.50, we may see some selling coming
in," the trader said.
"But we're not going to see a massive sell-off, even if
something does come out on Thursday, there'll be buying of dips.
Rates are low and are going to stay low for a long time and
that's one factor in the price of Bunds."
Trading is likely to remain thin on Monday with U.S. markets
closed for the Labor Day holiday.
Belgium kicked off a busy week for euro zone bond auctions,
selling 3.2 billion euros of bonds on Monday. Austria, Germany
and France also come to market this week
The latest U.S. payrolls report due on Friday -- with a
speech by Fed Chairman Ben Bernanke last week fanning
expectations of more monetary stimulus to fuel growth -- are
also likely to keep investors cautious.