LONDON: German Bund futures rose on Tuesday as elections that dealt a blow to Europe's austerity drive and failed to endorse Greece's main pro-bailout parties drove investors to seek safe havens.
Top-rated German debt and a sale of Dutch bonds benefited from multiple doubts about whether Greece can pursue the reforms needed to keep international aid flowing and how far new French Socialist leader Francois Hollande can change Europe's policy focus from austerity to restoring growth.
Dutch bond yields were down 3.3 basis points at 2.13 percent in the secondary market.
"It's gone very well overall, very slick and efficient," Marc Ostwald, strategist at Monument Securities said of the Dutch sale of 2022 bonds.
"It just emphasizes the point that spreads (premiums) relative to Bunds are that much more attractive and with Bund yields where they are and a lack of alternatives given uncertainties elsewhere, there is demand by default."
Ten-year German government bond yields fell 3.4 basis points to 1.57 percent - not too far from a record low of 1.549 percent.
"Part of it is the uncertainty about Greece. The most likely scenario is that they repeat elections now in the middle of June and of course we don't know what the outcome will be," Achilleas Georgolopoulos, strategist at Lloyds Bank said.
He also said the first meeting between Hollande and German Chancellor Angela Merkel, whose country has spearheaded Europe's austerity drive, would be key.
"Up to then, everybody is going to talk about how growth can be combined with austerity, but we need something concrete. And until we get that it's going to be a push for lower (German) yields," Georgolopoulos added.
Austria also holds an auction later in the day.
German Bund futures rose 42 ticks to 142.24, one day after hitting a record of 142.44 in volumes thinned by a holiday in Britain.
Greek 10-year bonds yielded 23.6 percent, compared to 23.2 percent in late European trading on Monday and reflecting expectations for another restructuring.
TECHNICAL VERTIGO
Analysts expected further upside in the Bund future but said rallies were losing momentum because German bonds were already trading at high levels.
Piet Lammens, strategist at KBC said shorting the Bund was not a profitable trade at this stage but he was also not advising clients to buy the contract at current levels.
"To investors we would say that at this stage we don't favour the Bund because the yields are much too low intrinsically," Lammens said.
He said if the Bund fell below the 140.04-139.80 area then he would reconsider that position.
"If we only test that level, as long as we are not below it, then we don't think that the climate has really changed," he said.
Austrian yields were also lower at 2.59 percent ahead of the debt sale. French bonds underperformed, with the 10-year yield up slightly at 2.81 percent.
"This is a very uncertain backdrop that we face. Ironically the greater challenge is probably the five-year German bond (sale) tomorrow," Ostwald added.