Euro zone government bonds rose marginally in thin trade on Monday, tracking stronger US Treasuries and supported by the failure of benchmark 10-year yields and swap rates to break key levels, analysts said. Bonds had slipped earlier on Monday after strong US jobs data on Friday dampened expectations of a rate cut by the Federal Reserve and drew cash away from government bonds into stock markets.
But investors failed to push 10-year Bund yields above 4.70 percent and swap rates above 5.00 percent. US Treasuries rallied, meanwhile, on safe haven bids driven by continued talk of hedge funds in trouble due to their exposure to the riskier elements of US credit markets. Investors were also drawn by yields near two-week highs after a selloff triggered by Friday's strong jobs report. "The US (bond market) seems to have a little bit more of a positive tone and is dragging the rest up with it," said Elisabeth Afseth, fixed income analyst at Evolution Securities.
By 1545 GMT, the September Bund future was up six ticks at 109.98, pushing the 10-year yield down to 4.67 percent. Ten-year swap rates which have been testing the psychological 5 percent level, also provided support for bonds, according to Orlando Green, fixed income strategist at Calyon.
"It's a key area where people start to get involved in swaps, so that may have supported the market." Ten-year swap rates were around 4.965 percent, down from 4.98 percent late on Friday, and 2-year swap rates were down slightly at 4.765 percent.
The September Euribor futures contract a gauge of short-term interest rate expectations, was half a basis point lower at 95.615. The interest rate-sensitive two-year Schatz yield was down half a basis point at 4.535 percent while the 30-year Bund yield was down 1.5 basis points at 4.785 percent. Given sparse top-tier economic data, traders said the bond market was largely rangebound on Monday.
"The Treasury market is a little bit stronger, we are waiting for the Bank of Japan interest rate decision (on Thursday) but this is lacklustre trading in a very narrow range," a trader said. The BOJ is expected to leave rates on hold at 0.5 percent on Thursday. A majority of market players expect rates will rise to 0.75 from 0.5 percent in August.
Bonds were little moved by data showing German industrial output rose by a slightly stronger-than-expected 1.9 percent in May, setting production the euro zone's biggest economy on an upward path again after it fell in April.
Financial markets also kept a close eye on oil prices, which hit an 11-month high above $76 a barrel as rising global oil demand and North Sea field maintenance fuelled supply worries.
"It will start to play on the minds of those who are fearful of inflation and that's going to be a negative environment for bonds," said Orlando Green at Calyon. He also added that the market was waiting to hear what Federal Reserve chairman Ben Bernanke might have to say about inflation and energy prices in a speech on Tuesday.
Also on Tuesday, euro zone supply picks up with Rhe Netherlands aiming to sell 6 billion euros of a new 10-year benchmark bond and Greece reopening a 10-year issue.
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