Germany's auction of its 10-year benchmark federal bond, known as bund, Wednesday attracted stronger demand than market watchers had expected, with German issues, widely perceived as the safest bet in the euro zone, benefiting from residual economic fears on the market despite reports of a possible bailout plan for Greece.

"[The] auction results were very good and even better than last time as regards the b/c [bid-to-cover ratio] and the percentage retained," said Aro Razafindrakola, strategist at Societe Generale SA in Paris, adding that dealers paid a price eight cents richer than the market price.

He said that this is "surprising" given the bond was expensive in relative value terms, and also given a strengthening in risk appetite Wednesday morning, as evidenced by a sharp tightening in sovereign spreads.

The Bundesbank, which is responsible for conducting the debt auctions in Germany, sold EUR4.233 billion of the bund 3.25% January 2020 at an average yield of 3.22%, with a bid-to-cover ratio of 1.7. The EUR5 billion issue attracted EUR7.230 billion in offers.

"The results are very much OK given the current environment with the Bund future more than one full point off its this year's high at 124.53 just three trading sessions ago," said David Schnautz, strategist at Commerzbank AG in Frankfurt.

The auction came as risk aversion eased significantly overnight on reports that Germany and the European Union are considering an aid package for Greece, although no concrete steps have been decided so far.

This has resulted in tighter 10-year yield spreads between not only Greece and euro-zone benchmark Germany, but also in the Spanish and Portuguese pairs, as the news buoyed other peripherals. With the likelihood of a Greek default falling, according to the market's assessment, so have the credit default swap costs in all three countries.

"The anti-escalation trade may well run further which could put more pressure on Bunds not only in relative value terms within the euro-zone government bond market but also in outright terms as some of the flight-to-quality premiums gets priced out," Commerzbank's Schnautz said.

However, Marc Ostwald, strategist at Monument Securities, said ahead of the auction that the Greek rescue plan sell-off has helped to create "the sort of concession" that was always going to be necessary given that yields were at the bottom of the 3.10%-3.40% range prevailing since August. The closer the market trades to 3.25%, "the more likely it is that those fund managers who have been waiting for a setback will put money to work," he said.

One thing market participants agree on is that volatility will prevail at least until Thursday's summit of European Union leaders.

"Until then, the market will remain volatile," said Societe Generale's Razafindrakola.

Deutsche Bundesbank Web site:

German Finance Agency Web site:

-By Emese Bartha, Dow Jones Newswires; +49 69 2972 5516;