LONDON: Bund futures fell to near 2-/1/2 week lows on Friday, as signs Greece could be nearing a vital deal with its private bondholders needed to avoid a messy default sapped demand for debt seen as a safe-haven.
Greece is running out of time as it needs to seal an agreement with its private creditors in coming days to pave the way for a fresh injection of international aid before 14.5 billion euros of bond redemptions fall due on March 20.
Investors were cautious as they looked for firm news out of Greece, with a rally in European equities running out of steam and limiting further falls in Bunds.
"There are encouraging signs the Greek PSI (private sector involvement) deal may be achieved soon, possibly even today and that's likely to keep bunds on the defensive," said Nick Stamenkovic, a rate strategist at RIA Capital Markets.
"It will cause some relief in the markets but there are still problems ahead for Greece...but the fiscal metrics in Greece are horrible the growth picture is pretty dire."
The Bund future fell as much as 42 ticks down on the day to 138.54. Stop-loss selling orders triggered around 138.85 spurred the move down, some traders said. The contract was last 22 ticks down at 138.74.
Cash 10-year Bund yields were up almost a basis point at 1.88 percent, with strategists seeing it rising to 2 percent in the near-term if Greece seals a deal with its pivate creditors.
"We ... see risks for a setback in Bund yields in an environment of ample liquidity, rising risk appetite and recovering economic sentiment," Commerzbank strategists said in a note.
"We hence prefer tactical Bund shorts, looking for 10y yields to trade back up toward 2 percent, as the trading range established at the end of last week, has been broken to the downside."
Improved U.S. economic data and bank earnings as well as solid auctions on Thursday from Spain which eased concerns for now about one of the bloc's biggest economies' ability to finance itself underpinned appetite for riskier assets.
Spanish bond yields, slipped three basis points to 5.24 percent, slightly outperforming German Bunds after a robust auction which saw it achieve 20 percent of its planned issuance this year.
Other peripheral euro zone bonds held largely steady, with the cost of insuring Italian, Spanish, French and Austrian debt falling.
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