LONDON: German bond yields fell on Thursday as worries over Greece's new anti-bailout government buoyed demand for top-rated assets from investors who were also starting to think the U.S. Federal Reserve could hold back any interest rate rise.
Athens looked to set to endure a fourth day of market jitters since Sunday's election with its newly-instated government at loggerheads with international creditors as it begins to roll back austerity measures.
Strained relationships in the euro area will likely be one of the international concerns that the U.S. Federal Reserve said could influence future rate decisions at Wednesday's policy statement.
Its nod to these "developments", during a statement that otherwise praised the solid pace of recovery in the world's largest economy, prompted some to push back expectations for the Fed's first rate hike since 2006 until the autumn.
"Overall the message could be regarded as marginally dovish, seemingly cooling enthusiasm for a June hike," said RBS in a note.
U.S. Treasury yields dipped in the wake of the meeting, with 30-year yields touching record lows.
When European markets opened, the euro zone benchmark German bonds followed suit, with 10-year and 30-year yields falling 2 bps to 0.34 percent and 0.96 percent, respectively.
But lower-rated bonds stuttered, with Portugal, Italy and Spain's 10-year yields up between 1-2 bps at 2.40, 1.62 and 1.46 percent, respectively.
While demand for these bonds remains supported by the ECB's pledge to start buying sovereign bonds from March, they have given up around 75 percent of the rally that followed the announcement of that scheme last week.
Greece, which investors fear could be on course for another default, has inspired this reversal of risk sentiment. Greek 10-year yields hit a 1-1/2-year high of 11.07 percent, up 26 bps on the day. The three-year equivalents were even higher at levels not seen since the 2012 debt restructuring.
Prime Minister Alexis Tsipras' vow to stick to anti-austerity pledges has led to fears he will scrap the country's bailout deal and renegotiate Greece's massive debts despite warnings from its main lenders, the European Union and International Monetary Fund.
ECB board member Benoit Coeure, who has already said the bank would not take part in any debt cut for Greece, said on Thursday that it must continue to abide by the rules of the game.
Tsipras has also unsettled European partners by criticising an EU statement that warned Moscow it faced new sanctions over its role in Ukraine.
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