LONDON: Renewed worries about the stability of the euro zone after a dismal election result for Greece's pro-bailout parties pushed German Bund futures to record highs on Monday and prompted investors to sell Spanish and Italian bonds.
Bond investors are seen likely to avoid riskier peripheral euro zone markets in the coming days as they watch efforts to form a ruling coalition in Athens. Safe-haven German Bunds are likely to maintain their month-long rising trend.
Policy uncertainty hit France as well after Socialist Francois Hollande won Sunday's presidential polls, although the premium investors want to hold French bonds rather than German benchmarks held steady at around 124 basis points.
Markets expected him to win but remain anxious to see how hard he will push to dilute a German-led European austerity drive and what plans he might have to foster growth.
Bund futures hit a record 142.44 before pulling back to 142.23. That was 18 ticks up on the day and some 700 ticks higher compared with the lows hit in mid-March. Cash 10-year yields fell to 1.554 percent, within a whisker of a record low of 1.549 percent. Trading was choppy due to a bank holiday in Britain.
"We're seeing a political landslide across Europe and this is creating uncertainty in the near term," Rabobank senior market economist Elwin de Groot said. "There is an (aid programme) implementation risk and secondly there is now a bigger risk that at some point Greece may step out of the euro."
Greece's PASOK and New Democracy parties - supporters of the bailout programme - looked set to capture well below 40 percent of the vote between them, making it tough to form a stable government.
If coalition talks fail, a new election as soon as next month is possible. If they succeed, the risk is that any coalition will be short-lived and will struggle to implement the reforms agreed with international lenders.
Without further bailout funds, a full-blown default is possible and some say this may force Greece out of the bloc.
Yields on Greek bonds, which already price in a high risk of a further restructuring, rose sharply, albeit in thin trade.
ING rate strategist Alessandro Giansanti recommended investors buy longer-dated German bonds in search for yield, predicting the spread between two- and 10- year yields could narrow to 130 bps in the near term from 148 bps currently.
The political uncertainty followed a raft of poor economic data from across the globe. On Monday, Spain, the current focus of the euro zone debt crisis, reinforced the trend with weaker than expected industrial output.
The Spanish/German 10-year government bond yield spread widened 6 bps to 423 bps. Outright yields were at 5.80 percent but analysts expected them to re-test the psychologically important 6 percent in coming days.
Yields have previously accelerated toward unaffordable levels once they have broken above that level.
"It will not be a matter of days until we have clarity on Greece. We will have to wait quite a while," DZ Bank rate strategist Michael Leister said.
"The fear is that at this level (6 percent) we will get some policy response but I think we can slice through, particularly in Spain in this environment."
Italian 10-year yields rose 4 bps to 5.65 percent, while French 10-year yields were 4 basis point lower at 2.79 percent.
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