LONDON: German debt futures seesawed on Wednesday as traders pounced on any signs that Greece was making progress towards sealing an urgently needed bailout, with the volatility unlikely to end this week.
Safe-haven German Bund futures, which rise when euro zone sentiment worsens, were last down two ticks at 138.50 after rebounding from early losses of up to 37 ticks.
Traders pinned the early fall on a promise from the Greek conservative party leader to deliver a letter of commitment on the budget reforms required by the country's international lenders to unlock a 130 billion euro bailout.
But that optimism soon gave way to concern that the EU's patience was wearing thin, typifying the recent swings in sentiment that have left long-term investors stymied by uncertainty over whether Greece will avoid a messy default.
"Everyone's cautious about taking (German) yields too much higher in case everything turns on a sixpence with regards to Greece," one trader said.
"We're keeping things very short-term here. When we get down to 137 in Bunds we're looking to get long and similarly when we near 140 we're looking to get short."
A lack of political consensus in Greece pushed expectations of when the bailout deal would be approved by euro zone finance ministers into next week.
That leaves Athens with little time to organise a bond exchange with private creditors to cut its debt stock - a key component of the bailout deal which is needed to avoid a default on March 20, when a 14.5 billion euro bond matures.
Medium-term expectations that Greece would secure the bailout persisted among market participants, with the expectation that event would bring a selloff in safe-haven Bunds and provide fresh impetus to the rally in lower-rated debt.
But the evident frustration of European policymakers meant the risk of a bailout not being agreed, and plunging Greece into a disorderly default, could not be ignored and limited traders' ability to take positions to profit from that view.
"Medium term, 1.90 percent in German (10-year yields) sounds like a good level to short, however you must have very wide stops," said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.
"If we get closer to March 20 and still (without a deal) you could see yields go much lower, but then in three months' time if everything has gone positive we could be at 2.5 percent."
Despite concerns that Portugal could follow in Greece's footsteps, the country found high demand for its 3 billion euro auction of short term bills, resulting in lower yields than at previous sales.
The market will face a tougher test of supply on Thursday when Spain and France issue bonds. Yields on both countries' debt were broadly steady across the curve.
Although Greece remains a major driver of sentiment that could hit international demand for comparatively-risky Spanish bonds, domestic banks saturated with cash borrowed from the ECB were likely to ensure a smooth sale, analysts said.
The Netherlands also announced the sale of its first ever dollar bond with a $2 billion auction of paper with a five-year maturity scheduled for February 16.