ECONOMY

Southern European yields hit 5-month lows on Portugal vote, Spain upgrade

southern-european-yields-hit-5-month-lows-on-portugal-vote-spain-upgrade

Southern European bond yields hit five-month lows on Monday after Portugal's ruling centre-right coalition won re-election and Standard & Poor's upgraded Spain's rating.

Bonds in Spain, Portugal and fellow low-rated Italy outperformed euro zone peers on a day when yields were mostly higher across the region as investors, buoyed by chances of looser-than-expected global monetary policies, preferred stocks.

Portugal's coalition led by Pedro Passos Coelho took a winning 38.5 percent of Sunday's vote, although it lost its majority in parliament. Socialist challenger Antonio Costa secured 32.4 percent.

The election creates some political uncertainty. No minority administration has lasted a full term in Portugal since the overthrow in 1974 of dictator Antonio Salazar. But investors are taking heart from pledges by both Passos Coelho and Costa to stick to strict European Union budget deficit limits.

"The only difference from what we had before is that we have no clear majority so it means that the government could be more vulnerable," said Patrick Jack, rate strategist at BNP Paribas. "But at the end of the day it won't change economic policies."

Ten-year Portuguese bond yields were up 2 basis points at 2.34 percent. They fell to a five-month low of 2.269 percent at the open on the back of the election result, but then rose as most other euro zone yields moved up.

The result of the elections was broadly in line with some of the latest polls and did not surprise the market.

"With both main contenders openly pro-euro, markets have followed campaign developments calmly, assuming that, whoever the winner, there would be no major departure from fiscal discipline," said Paolo Pizzoli, senior economist at ING.

German 10-year Bund yields were 4 basis points higher at 0.55 percent. Most other yields on top-rated bonds were 3-4 bps higher as investors preferred riskier assets, such as stocks, as weak U.S. jobs data on Friday pushed the prospect of a Federal Reserve rate increase to early 2016.

"Markets have been scaling down quite drastically expectations of a rate hike happening this year, and that is supporting risk appetite and stock markets," SEB head of fixed income research Jussi Hiljanen said.

Lower-rated euro zone debt is also benefiting from expectations the European Central Bank will soon expand its trillion-euro bond-buying programme to stoke up inflation.

The below-forecast U.S. employment data renewed worries about a global economic slowdown and strengthened the euro, increasing pressure on the ECB.

Recent election results have been supportive for southern euro zone markets. Greece's vote did not yield a hung parliament as many had expected, while a vote in the Spanish region of Catalonia did not give pro-independence parties a clear mandate.

Spanish 10-year yields touched a five-month low of 1.75 percent after Standard & Poor's upgraded the country's rating by one notch to BBB+, citing a strengthening economy and solid labour reforms. By midday, yields were flat on the day at 1.79 percent.

Italian yields tracked their peers to five-month lows of 1.609 percent, before bouncing to 1.64 percent.

[Reuters]