LONDON: German Bund futures were little changed on Friday as investors braced for US jobs data later and elections in two euro zone states on Sunday that could determine the fate of austerity measures aimed at deficit reduction but seen dragging on growth.
With both Greek and French voters going to the polls, markets are fearful that parties which disagree with Europe's obsessive focus on fiscal discipline will gain more sway.
On Friday, however, investors were watching US non-farm payrolls data due at 1230 GMT for clues to the strength of the US recovery after data this week painted a mixed picture of the world's largest economy.
"I don't think people have a massive amount of risk on. Psychologically, people are looking for a slightly softer number," said one trader.
The German Bund future was eight ticks lower at 141.64 not far off record highs set earlier in the week at 141.83. Ten-year government bond yields were flat at 1.62 percent.
A strong manufacturing number and a drop in weekly jobless claims earlier in the week helped soothe some concerns that the US recovery was losing momentum but a slowdown in the services sector showed the jury was still out.
Analysts would look for answers from the jobs data which is expected to show that US employers added 170,000 workers to their payrolls last month, according to a Reuters survey, up from March's 120,000.
A number below 100,000 could see Bund futures rally but trade should remain range-bound ahead of an election-packed weekend and a long weekend in Britain, analysts said.
Elwin de Groot, senior market economist at Rabobank, expected the euro zone's sluggish economy and intractable debt crisis to continue to favour a safety bid as long as policymakers did not take steps towards a closer fiscal union.
He expected 10-year German bond yields to fall to 1.40 percent in three to six months and the two-year German bond yield to reach zero over the same period. Two year German bond yields are currently yielding 0.09 percent.
ELECTIONS
The reaction to Socialist Francois Hollande's expected victory in France could be limited as markets are already working with that possibility. The premium investors require to hold French debt over German Bunds has risen in recent months, reflecting fears Hollande will keep a looser rein on public finances than current president Nicholas Sarkozy.
The 10-year French/German government bond yield spread was trading at 127 bps, up from 95 bps in March, but off a five-month high hit in April at 155 bps.
Investors bought into Belgian bonds ahead of the French elections, traders said, pushing 10-year Belgian bond yields 4.4 bps lower to 3.3 percent.
"I think a lot of people have been looking at it as a safe-haven versus France I don't think there is anything fundamentally attractive about Belgium," said a second trader.
The Greek elections could be more unsettling since the results remain highly uncertain, analysts said, and market players are going into the vote on the defensive.
A slim majority by the pro-bailout coalition could make it difficult for the country to implement the reforms set out by international lenders.
Without them, Greece would cease to receive bailout funds, paving the way for a second debt restructuring and, some analysts say, threatening its membership of the euro.
Others say that undertaking the reforms could lead Greece to the same fate by choking the recession-ravaged economy.
"I am more concerned about the Greek elections," de Groot said. "There is actually a bigger risk that the implementation of those (reform) measures runs into trouble. That would bring Greece back into the spotlight."
Ahead of the vote, Greek bonds traded at a heavy discount, with yields up 14 bps at 20.7 percent - reflecting expectations for another potential restructuring and even the possibility that the debt could eventually be redenominated into a different currency, according to analysts.
Other non triple-A rated euro zone debt was little changed, with 10-year Italian government bond yields 2 bps lower at 5.49 percent and the Spanish equivalent flat at 5.80 percent.
"The likelihood is that the two parties that governed Greece over the last five years are going to perform very poorly, which is a reflection of the public turning against austerity hardly surprising given the depth of depression the Greeks are facing," said Nick Stamenkovic, strategist at RIA Capital Markets.
"The key question going forward is whether a forthcoming coalition is going to put in place further fiscal measures essential to getting external support in the future."
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