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[LONDON] Germany's 10-year bond yield slipped to its lowest level in around 1-1/2 weeks on Monday, after talks to form a coalition government failed and raised the risk of fresh elections in the euro zone's biggest economy.
The political crisis at the heart of Europe lifted demand for safe-haven government debt, although the euro fell sharply against other major currencies and Germany's benchmark stock index opened lower.
The pro-business Free Democrats (FDP) unexpectedly late on Sunday pulled out after more than four weeks of negotiations with German Chancellor Angela Merkel's conservative bloc and the ecologist Greens, citing irreconcilable differences.
Germany now faces two possible options unprecedented in the post-World War Two era: Mrs Merkel forms a minority government, or the president calls a new election if no government is formed.
"The collapse of the talks was a surprise and there is little clarity on how things will unfold from here," said Rainer Guntermann, rates strategist at Commerzbank.
"It adds to uncertainty which is weighing on risk sentiment in world markets."
The yield on Germany's benchmark 10-year government bond, perceived as one of the safest assets in the world, dipped around 1.5 basis points to around 0.35 per cent, its lowest level since Nov 9.
But the euro fell to a two-month low against Japan's yen and was down around 0.3 per cent against the US dollar. Germany's blue-chip stock index opened almost 0.5 per cent lower.
Mrs Merkel was weakened after a September election as voters angry with her decision in 2015 to open Germany's borders to more than a million asylum seekers punished her conservatives by voting for the far-right Alternative for Germany party.
The centre-left Social Democrats (SPD), Mrs Merkel's current coalition partners who were the second-biggest party in the election, have ruled out a repeat of an alliance with her conservatives.
"Merkel is clearly weakened further by all this, and there is even chatter for potential leadership challenges ahead," analysts at Rabobank said in a note.