Bunds fall after Greek election, relief limited

LONDON: German bond prices fell on Monday after an election victory for Greece's pro-bailout New Democracy party staved off fears of an imminent Greek exit from the euro zone, but the relief looked to be limited and short-lived.

Political parties in favour of the country's life-support bailout began forging a government on Monday after a narrow victory over radical leftists that wanted to tear up the existing agreement.

That brought relief to financial markets, easing demand for the relative safety of German debt, boosting equity markets and lifting the euro to a one-month high against the dollar.

"The market was positioned for a result that was more uncertain than it actually is ... the result is more favourable than feared," said Patrick Jacq, strategist at BNP Paribas in Paris.

German Bund futures were last 36 ticks lower at 141.93, but rapidly pared early losses that saw the contract hit a low of 141.14 shortly after the open.

In the cash market 10-year yields rose 9 basis points to briefly hit 1.544 percent, their highest since mid-May, but were last at 1.48 percent.

"Clearly this is not a strong rebound of risk appetite, it's more the risk off mode losing some momentum. We have a limited correction and I don't think this will spread to a strong selloff in benchmark paper," Jacq said.

FLEETING RELIEF

Higher-yielding euro zone debt found only limited relief. In early trading Spanish 10-year bond yields fell 3 bps to 6.89 percent, while Italian yields were last at 5.9 percent, down 2 bps on the day.

Few expected the Greek election result to prove a turning point in the debt crisis that has enveloped Spain in recent weeks.

Market participants highlighted the slim margin of the election victory as a source of uncertainty in Greek policy making and said the country could still end up leaving the euro zone if it cannot renegotiate and stick to its bailout terms.

"We remain sceptical of any concerted risk rally after the initial move ... recently these rallies haven't lasted as long as people expect," a trader said.

Last week, the agreement of a banking rescue worth up to 100 billion euros for Spain's troubled lenders sent the price of its government bonds tumbling on fears that private creditors would be pushed further down the queue for repayment.

Concerns over Spain were likely to intensify ahead of a difficult auction due on Thursday as Madrid battles to maintain market confidence in its debt after bond yields hit 7 percent last week.