U.K. and German government bonds sold off on Wednesday after weak government bond auctions in both countries initially spooked investors, though analysts said it was more likely a sign of investor caution ahead of the European Central Bank (ECB) meeting on Thursday.
Germany sold just 3.61 billion euros in 10 year Bunds, less than the 5 billion euros that it had planned, signaling weak demand from investors for debt issued by one of Europe's strongest economies.
The sale drew bids worth just 1.1 times the amount allotted to investors, less than the 1.8 times achieved at a similar sale in August.
The average yield was 1.42 percent, the same as in August. Bond yields and prices move in inverse.
Similarly, the U.K. achieved a bid-to-cover ratio of just 1.52 at its sale of 1.75 billion pounds of benchmark 30-year gilts, well below the level of 2.22 achieved at a sale in May.
The December gilt future sank to a session low of 120.79 after the auction results were published, well below levels of around 121.10 just before the result came out, according to Reuters. But the Euro and stocks held steady, despite the disappointing auctions.
Analysts said investors were probably sitting on the sidelines on hopes the ECB will announce a new bond buying program Thursday to help reduce funding costs for countries on Europe's periphery.
Marc Ostwald of Monument Securities told CNBC another reason could be the extremely low yields that safe-haven U.K. and German bonds currently offer investors.
"I was very unsurprised, given that there’s a lot of optimism the ECB will act," Ostwald told CNBC.
"Yield levels have been for a long time very, very unattractive. You’re seeing it across the board… Markets are incredibly thin at the moment."
Bond buying by the ECB could push down yields paid by governments in countries such as Spain and Italy, while raising yields on countries at the core of Europe such as Germany and France, who would be on the hook for further losses if the debt crisis worsens.
Alessandro Giansanti, rate strategist at ING in Amsterdam told Reuters, further measures by the ECB could "trigger a sell-off in Germany."