Greece, bank worries favor safe-haven debt buying

German government bond yields fell close to record lows on Friday as investor doubts that Greece will break its political deadlock and JPMorgan’s revelation of a huge trading loss favored demand for low-risk investments.

The negative tone in riskier assets and concerns Spain’s efforts to fix its ailing banking sector may stretch its shaky public finances nudged Spanish yields to just over 6 percent with no letup in pressure seen before debt sales next week.

German Bund futures fell briefly after Greek conservative leader Antonis Samaras said there were still hopes a government could be formed after Sunday’s inconclusive election.

Talks between the parties were seen as a last-ditch attempt to form a coalition. Many traders and analysts expect Greece to hold 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 favorable for safe havens such as the German Bund, US T-note and gilts and for wider peripheral euro zone spreads.”

German 10-year yields were three basis points lower on the day at 1.51 percent, having hit an all-time low of 1.497 percent on Wednesday. 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.”

The June Bund future was last up 22 ticks at 142.83 as global equity markets fell after JPMorgan, the biggest U.S. 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 – bad banks – 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.

“Spain and Greece are the factors playing in favor of volatility remaining high in the market in the next few weeks,» said Chiara Manenti, a rate strategist at Intesa SanPaolo.

“It will be important that the so-called bad banks will be implemented without a large contribution from the Spanish government.”

Spanish bonds 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 slipped to 5.67 percent after healthy demand for ultra-short debt drove its borrowing costs down at a treasury bill auction.

Traders and strategists still saw little impetus for further falls in Italian yields before bond auctions next week which could prove more challenging as sentiment in European markets remains fragile.

“We’re keeping long positioning on benchmarks…and being rather short on peripherals. The bid for safety makes sense at the moment,» Jacq at BNP Paribas said. [Reuters]