LONDON: German government bond yields held near record lows on Friday as investor doubts that Greece will break its political deadlock and JPMorgan's revelation of a huge trading loss supported demand for low-risk investments.
Greek conservative leader Antonis Samaras said there were still hopes a government could be formed after Sunday's inconclusive election, prompting a brief fall in German Bund futures.
Talks between the parties were seen as a last-ditch attempt to form a coalition. Many traders and analysts expect Greece to gold fresh elections in coming weeks, with no party seen winning a clear majority, potentially threatening the country's euro membership.
"The situation is critical and could be terrible if there's no such majority in coming weeks because with no more financial bailout Greece will default and its banks will collapse and ultimately it could mean Greece would have to leave the euro zone," BNP Paribas strategist Patrick Jacq said.
"This is what's driving the market at the moment...The environment remains very favourable for safe havens such as the German Bund, US T-note and gilts and for wider peripheral eurozone spreads."
German 10-year yields were slightly lower on the day at 1.53 percent, having hit an all-time low of 1.497 percent on Wednesday and with some traders saying another break below 1.50 percent could prove tough with Bunds looking overbought.
"We have tested 1.50 (percent) three times and it bounced back. It is a completely overbought market and there's a broad view of a correction coming," one trader said.
"I'm pretty sure some will buy the dip here but we can't find any more excuses to buy the Bund below 1.50 in yields."
TOXIC LOANS
The June Bund future stabilised around 142.60, reversing earlier gains made as global equity markets fell after JPMorgan, the biggest US bank by assets, shocked investors with a trading loss of at least $2 billion from a failed hedging strategy.
Some strategists said the Bund future could retest Wednesday's record high of 143.03 if the political impasse in Greece remained unresolved and Spain's plans to cleanse its banks of toxic real estate loans failed to reassure investors fretting about its fragile public finances.
Spain will give details on Friday of the plan that will force banks to park their troubled real estate loans in holding companies which will eventually sell them.
While some market participants cautiously viewed this as positive, others said it does not go far enough to tackle a crisis which could deal another blow to Spain's fragile public finances.
Spanish 10-year yields edged up to 6.0 percent and were seen remaining under pressure before debt sales next as investors worried that more pressure on its domestic banks could undermine their ability to buy the country's debt.
Italian 10-year yields fell slightly to 5.65 percent but traders saw little impetus for further falls before bond auctions next week which could prove challenging as sentiment in European markets remains fragile.
"Together with wider political concerns across Europe, there has been a rise in general risk aversion, with equities tumbling, widening credit spreads and volatility in peripheral bond markets," Citi strategists said in a note.
"Given this backdrop and the unlikely prospect of a comprehensive EU/Troika policy response in the near term, it is hard to argue for a sustainable fall in Spanish or Italian yields any time soon."
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