By Abhinav Ramnarayan
LONDON, May 27 (Reuters) - Spanish and Portuguese bond yields hit record lows on Monday after European parliamentary elections showed pro-EU parties retained a strong majority, bolstering investor sentiment.
Though nationalist and far-right parties made significant gains, they were not as large as some investors had thought, and parties committed to strengthening the European Union held onto two-thirds of seats in the EU parliament.
"The populists gained significantly but from a market point of view, it wasn't as good a performance as was feared," DZ Bank analyst Rene Albrecht said.
"There's now a chance for a pro-EU grand coalition of liberals, social democrats and conservatives," Albrecht added.
Spain's Socialists also won most votes in European and local elections on Sunday, while Portugul was boosted by ratings agency Fitch giving its sovereign credit rating a positive outlook.
As a result, Spanish 10-year bond yields ES10YT=RR hit a record low of 0.808% while the Portuguese equivalent PT10YT=RR dropped to 0.959%, also its lowest on record in thin trading due to holidays in Britain and the United States.
Far-right and nationalist parties did, however, make strong gains in the vote, anchoring German 10-year Bund yields at -0.133%, a 2-1/2 year low. DE10YT=RR
Yields were also pushed lower by U.S. President Donald Trump's comments that suggested he wishes to re-examine trade relations with Japan, sparking further trade fears.
Elsewhere, Greek government bond yields dropped sharply, with the 10-year yield GR10YT=RR briefly hitting 3% for the first time, after Greek Prime Minister Alexis Tsipras was left struggling for his political survival after his Syriza party was hammered in European Parliament elections.
"Syriza were starting to spread some gifts ahead of the elections and investors were starting to worry about Greece not achieving the primary surplus they need," Albrecht of DZ Bank said. "Now markets are hoping for a more conservative party who will be more disciplined on spending."
The closely watched Italy/Germany bond yield spread, seen by many investors as a barometer for risk sentiment, briefly tightened to its lowest in over two weeks in early trade to 264 basis points DE10IT10=RR but this trend shifted as the session wore on, and Italian yields were higher about two basis points across the board. IT2YT=RR, IT10YT=RR
A strong showing from Matteo Salvini's League party over coalition partner 5-Star Movement would likely trigger speculation about a general election in the euro zone's third-largest economy.
"The Italian budget process will remain most relevant and investors wary about the more complex political decision making," Commerzbank rates strategists said in a note.
Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
(Reporting by Abhinav Ramnarayan; Editing by Toby Chopra and Alexander Smith)
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