November 7, 2016 / 9:28 AM / 9 months ago

UPDATE 3-Portuguese, Greek bond prices jump, safe-haven Bunds slip

(Adds Brexit update, quotes, updates prices)

By Dhara Ranasinghe

LONDON, Nov 7 (Reuters) - Portuguese and Greek government bond yields fell sharply on Monday, standing out as the euro zone's star performers as an easing in U.S. election jitters nudged safe haven yields higher.

Greece's prime minister, Alexis Tsipras, raised the prospect on Sunday that Greek government bonds could be included in the European Central Bank's bond-buying programme early next year, triggering a sharp fall in Greek yields across the curve.

In Portugal, benchmark 10-year bond yields tumbled almost 9 basis points to 3.21 percent in early trades after the Socialist government late on Friday won approval for the 2017 budget with support from two far-left allies.

The budget aims to slash the budget deficit to 1.6 percent of GDP from 2.4 percent this year, but also includes tax cuts and public pension hikes which ensured support from the far-left Communists and Left Bloc for the bill.

The absence of announcements on bond auctions for this week helped boost sentiment towards Portuguese bonds. Bond yields often rise in anticipation of new supply.

"There was some uncertainty over the budget as Portugal doesn't have a proper coalition government, more of an alliance, which kept its act together," said David Schnautz, a rates strategist at Commerzbank.

"This, combined with the fact that Friday would have been the day for Portugal to announce an auction and that didn't happen, explains why the bond market is in a bit of a sweet spot."

The fall in Portuguese bond yields pulled the gap over benchmark German Bund yields to about 307 basis points -- its tightest level since August.

The move stood out on a day when most euro zone bond yields nudged higher, while yields on peripheral peers -- Italy and Spain -- were down about 3 bps each.

Safe-haven German bond yields were pulled higher with U.S. Treasury yields after the U.S. Federal Bureau of Investigation said on Sunday it would take no further action against Hillary Clinton over her use of a private email server for government work, boosting the Democrat presidential candidate's prospects of winning Tuesday's election.

"Market participants are more convinced that a victory for Clinton is more likely," said DZ Bank strategist Rene Albrecht.

"But the U.S. election is still an event risk and a tight result on Wednesday morning could renew the bid for safe-haven bonds."

Still, Bund yields pulled back from session highs, with news that the British government is preparing legislation to trigger the procedure to leave the European Union highlighting other risks ahead.

By 1620 GMT, 10-year German government bond yields were at 0.15 percent, up 1.2 basis points on the day.

GREEK YIELDS DIVE

Greece's borrowing costs were sharply lower across the board on Monday, with investor sentiment boosted by a cabinet reshuffle on Friday and the comments from Tsipras.

Two-year yields touched a record low at 4.767 percent , according to Tradeweb data. Greece's 10-year bond yield fell 36 basis points to 7.625 percent, its lowest level in five months, while five-year yields were down almost 40 bps.

Tsipras told his new cabinet on Sunday that a second bailout review will be concluded in time for debt relief talks to begin in December.

If a review can be completed, Tsipras said, Greece may be included in the ECB's asset-buying programme within the first quarter of 2017. It can then regain access to the bond market by the time its current bailout expires in 2018.

"Tsipras yesterday mentioned that Greek government bonds can be included in the QE programme in the first quarter of next year. This could be feeding through to the price action today and maybe some domestic investors are taking him at his word," said ING strategist Martin Van Vliet.

"I would be very cautious: Greece has made some progress and has received disbursements from (eurozone bailout fund) ESM, but further progress needs to be made. Having said that, if the ECB includes Greece in QE, that is a game changer," he added. (Additional reporting by Abhinav Ramnarayan; Editing by Toby Chopra, Greg Mahlich)

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