EURO GOVT-Hunt for yield boosts French bonds, Bunds ease
* French yields match euro-era lows, Bund spread tightens
* German Bunds slip, but moves seen limited by Greek risks
* Italy, Spain still under threat from Greek contagion
By William James
LONDON, May 25 (Reuters) - French bond yields matched their lowest levels since the launch of the euro on Friday, leading a rally across the currency bloc, as investors pumped cash into assets offering better returns than safe-haven German debt.
Though there was momentum behind buying of French, Austrian and other higher-yield euro zone debt, analysts said the moves were opportunistic and not a sign that longer-term investors were becoming more positive about the health of the euro zone.
"In the absence of bad news there's a bit of a hunt for yield. Bunds are at such a low level I think there's some strategic reallocations going on," said Rabobank strategist Lyn Graham-Taylor.
The risk that Greece may be forced out of the currency bloc following June 17 elections, and the unknown repercussions that would bring for the whole euro zone, has pushed investors to seek out the safety of German debt despite ultra-low yields.
But analysts said there was no clear trigger for the move into other sovereigns. That meant it could reverse quickly if worries about Greece, Spain's struggling banking sector or weak growth across the bloc were again pushed to the fore.
"This is all built on very shaky ground, and we could easily see things reversing again," said DZ Bank strategist Michael Leister. "The market is trading political headlines which means, in turn, the market will remain very volatile for the time being."
Traders reported that a trickle of funds out of German debt and into bonds with a higher yield earlier this week had accelerated into a decent flow. They added price moves had been exacerbated by low liquidity and automatic buying triggers that limit losses on existing bets forecasting yields would rise.
The 10-year French yield fell to a low of 2.43 percent, matching its lowest in the 13-year history of the euro zone and testing the lowest level on record, according to Reuters data going back to mid-1990.
Demand eased slightly as the session progressed, pushing the French yield back up to 2.5 percent while the equivalent German yield rose 1 basis point to 1.40 percent.
The spread between the two country's bond yields was 111 bps, testing the 200-day moving average which at 114 basis points could be a technical barrier to further tightening. Previous attempts to push decisively below the moving-average in February and March both failed.
In German debt futures, where lower than average volume was evidence of poor liquidity, the June contract stood 9 ticks lower on the day at 143.88 - firmly within the week's 152-tick range.
Spanish and Italian bonds initially benefited from the search for yield, falling around 10 bps each, before rising back to their opening levels near 6.18 percent and 5.69 percent respectively.
Market participants were doubtful any fresh rallies could be sustained given the huge potential fallout from a Greek exit, and the lack of any sign policymakers will take steps to prevent contagion to the region's third and fourth largest economies.
Despite the demand for higher yields, German debt was not expected to lose its appeal to the large base of investors looking for a safe place to park cash until uncertainty over Greece is resolved.
"I can't see why we would aggressively sell off. Even with some of the moves we had into semi-core yesterday Bunds still traded quite well really," a trader said.
UBS technical analysis pointed to solid resistance for the Bund future at Tuesday's 143.03 session low, while a close above the 144.06 May 18 session high was needed to signal further rises.
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