LONDON, Sept 30 (Reuters) - German government bond yields dropped back towards six-week lows on Friday, giving up Thursday's oil-induced rise as concerns over the health of the country's biggest lender resurfaced.
Deutsche Bank admitted it had an image problem with investors after reports on Thursday that a number of hedge funds had withdrawn cash from the bank, sending its U.S.-listed shares to a record low.
The government has had to deny it is working on a rescue plan for Deutsche and the bank's woes have crystallised concerns about the country's financial sector where its second largest lender Commerzbank announced plans to cut thousands of jobs.
Yields on Bunds - seen as a safe haven by investors - fell to six-week lows this week, and despite a rise late on Thursday after an oil output deal sparked expectations for higher inflation, they fell back to those lows again on Friday.
"Markets are just getting to grips with the latest news overnight on Deutsche which has made investors take risk off the table," Rabobank strategist Lyn Graham-Taylor said.
"It doesn't matter whether the bank is in real trouble or not, as long as people think it is, then it is bad news."
German 10-year bond yields fell 4 basis points to minus 0.161 percent, matching a level struck on Tuesday, which was the lowest since mid-August.
Strategists said euro zone inflation data, due at 0900 GMT, which is expected to show a doubling of price growth on the year to 0.4 percent, could put upward pressure on yields.
That could still put inflation well short of the ECBs target of just under 2 percent but might be enough to prompt questions about whether the ECB's ultra-loose monetary policy is, at last, starting to work.
On the ratings front, Spain is set to be reviewed by Standard & Poor's later on Friday, at the end of a week which has seen ructions in its Socialist Party renew concerns about political stability in the euro zone's fourth-biggest economy.
Strategists at Commerzbank said the firm may change the stable outlook on the country's BBB+ rating to negative.
Spain's 10-year bond yields rose 1 basis points to 0.93 percent, as did yields in other low-rated bonds in Greece, Portugal and Italy.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Louise Ireland)