By John Geddie
LONDON, May 15 (Reuters) - Euro zone bond yields fell on Friday, tracking an overnight move in U.S. Treasury yields, but strategists remained cautious about the market's prospects following weeks of violent price swings.
German 10-year yields dropped 7 basis points to 0.64 percent, but remained far above a record low of 0.05 percent hit last month. U.S. Treasury yields fell to 2.17 percent, down sharply from Thursday's high of 2.29 percent.
Erratic swings in market prices, which have seen even the most liquid German bonds move in a 20 basis point range in recent trading sessions, have kept investors sidelined.
Citi's head of rates strategy Alessandro Tentori said Friday's moves alone may not tempt investors back because many use 'value-at-Risk' models that have strict limits in volatile conditions.
"I really want to see a protracted period of low volatility first, because most investors look at risk-adjusted returns," said Tentori.
"When volatility drops and yields stay at 0.65-0.75 percent then all of a sudden this seems like a lot of yield. But with volatility like it is right now, risk-adjusted yields are still very low."
Traders were also cautious that the rally could be sustained with volumes remaining low after several European countries were closed for a public holiday on Thursday.
The sharp fall in U.S. Treasury yields, coupled with a slide in the U.S. dollar and a bounce on Wall Street, was attributed partly to weak U.S. producer data on Thursday that further dampens the prospect of a near-term interest rate rise.
Some strategists said this had been a cue for investors to dip their toes back into financial markets.
"This looks like a day of previously shell-shocked investors moving out of cash, back into taking risk," said Mizuho's Peter Chatwell.
Low-rated euro zone bond yields also fell on Friday. Portuguese, Italian, Spanish 10-year yields were down 7-10 basis points at 2.32 percent, 1.80 and 1.76 percent, respectively.
Greece's increasingly fragile financial situation has done little to rattle investors this week, as talks with its creditors drag on.
But with top officials from EU paymaster Germany ripping into the European Central Bank over loans to Greek banks and calling for it to hold a referendum on bailout terms, Athens' position within the currency bloc is in the balance.
This uncertainty may make it difficult for markets to find a firmer footing in the coming weeks, say traders. Greek 10-year yields bucked the broader trend on Friday, rising 21 bps to 10.78 percent. (Reporting by John Geddie; Editing by Crispian Balmer)