Euro zone government bond yields fell on Friday as investors ploughed into safe haven assets amid uncertainty about who planted bombs which claimed nearly 200 lives in Madrid a day ago.
US Treasury prices were also firmer in New York late on Thursday, rebounding after a letter purporting to be from al Qaeda said it was "ninety percent" ready for a strike on US targets.
Traders chalked up the risk premium of events in Madrid on 10-year Treasuries at around 50 ticks.
The highly liquid two-year Schatz yield was down 3.6 basis points at 2.134 percent, having hit an intraday low of 2.109 percent, just above an eight-month low hit on Thursday in the wake of the Madrid bombings.
The 10-year Bund yield was down 2.8 basis points at 3.888 percent.
Meanwhile, the 10-year T-Note future was up 12 ticks since the New York close on Thursday at 116-08/32
T-Notes gained on safe haven inflows despite a 10-year bond auction which was poorly received on Thursday. A total of $11 billion of T-Notes were sold at a bid-to-cover ratio of 1.8 times. The paper had turned expensive ahead of the sale as investors flocked to bonds after the Madrid bombings.
"US T-Note futures...ought to be about 20 ticks lower after the awful 10-year bond auction last night (Thursday). Instead they are around 30 ticks higher. That's your risk premium from the (Madrid) events," said a trader in London.
The Spanish government said it believed armed Basque separatist group ETA was most likely to blame for the simultaneous bombings of four trains at Madrid stations on Thursday three days before a general election.
ETA has maintained a terror campaign, killing around 850 people since 1968 in its fight for a separate Basque homeland in north-west Spain.
However, Spanish Interior Minister Angel Acebes said police were not ruling out any lines of investigation after finding a van containing seven detonators and a tape in Arabic at a town near Madrid where the bombs may have been placed on the trains.
Apart from those killed, some 1,421 people were injured in Europe's bloodiest guerrilla attack for more than 15 years.
The June Bund future was up 28 ticks on the day at 116.24, having scaled 116.32 earlier.
"Who will go short of a market like this on Friday with a lot of risk premium built in? We could retest 116.48 today and next resistance is at 116.67. I don't think the market will fall today but support is at 115.78," said Steve Ballard, technical analyst at Barclays Capital in London.
June interest rate futures, a gauge of short-term euro zone interest rate expectations, spiked 4.5 basis points at the opening to 98.040, just shy of the recent high of 98.050 struck on March 1 and were last seen up 1.5 basis points at 98.020, implying three-month money rates at 1.98 percent. The European Central Bank's key rate is at 2.0 percent.
Markets trained on the Madrid bombings hardly blinked when French January industrial output was reported unexpectedly falling 0.5 percent month-on-month.
Similarly, markets showed no immediate reaction to slightly stronger than expected inflation data from France. European Union-harmonised February consumer prices rose by 1.9 percent year-on-year, compared with a consensus forecast for a 1.8 percent hike.
Bunds were steady against Treasuries, with the 10-year yield spread unchanged such that German debt yielded 16 basis points more than T-Notes.
The euro swap spread was steady at 15 basis points.
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