Credit: REUTERS/KAI PFAFFENBACHBy Abhinav Ramnarayan
LONDON, May 27 (Reuters) - Spanish and Portuguese bond yields were hovering around record lows on Monday morning after a European parliamentary election result that showed pro-EU parties retained a strong majority, bolstering investor sentiment.
Though nationalist and far-right parties significant gains, they were not as large as had been feared by risk-averse investors, and parties committed to strengthening the European Union held onto two-thirds of seats in the EU parliament.
Spanish 10-year bond yields ES10YT=RR were close to their lowest levels on record at just above 0.82% while the Portuguese equivalent was at 0.976%, also close to a record low, in thin trading due to holidays in Britain and the United States.
"Together with the liberals and greens, pro-European groups will still hold a clear majority of two-thirds of the seats in the next European parliament," Deutsche Bank economists said in a note. "But policymaking for them will likely become more complex and require broader cross-party agreements and discipline."
That said, far-right and nationalist parties did make strong gains in the vote, so German 10-year Bund yields were anchored at -0.121%, close to 2-1/2 year hit in mid-May. DE10YT=RR
Italy's bond yield spread over Germany tightened to its lowest in over two weeks in early trade on Monday to 264 basis points DE10IT10=RR but this trend shifted as the session wore on, and Italian yields were broadly higher 3-4 basis points. 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," said Commerzbank rates strategist Rainer Guntermann.
"Overall we expect a reasonably modest market response also considering the light data calendar and the UK and U.S. holidays."
(Reporting by Abhinav Ramnarayan; Editing by Toby Chopra)
((thomas.wilkes@tr.com; Reuters Messaging: thomas.wilkes.thomsonreuters.com@reuters.net))
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