* Merkel's CDU enjoys rare win in most populous state
* Bunds outperform euro zone peers
* Austria on course for snap election
* Oil prices jump 2 pct, pressure broader bond markets
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, May 15 German bonds had a slight edge
over euro zone peers on Monday after Chancellor Angela Merkel's
conservatives defeated the ruling Social Democrats in a key
state election, lifting their hopes of retaining power in
September's national vote.
Most euro zone government bond yields rose 2-3 basis points
as a 2 percent jump in oil prices stoked inflation expectations.
But German yields lagged the trend, drawing support from
Sunday's state election in Germany's most populous state of
North Rhine-Westphalia -- home to one in five German voters and
often an indicator of national electoral trends.
According to projections, Merkel's Christian Democrats (CDU)
won 33 percent of the vote, up from 26.3 percent in 2012. The
third win for the conservatives in state elections since the end
of March over rival Social Democrats (SPD) has boosted Merkel's
chances of securing a fourth term as chancellor later this year.
Merkel's more fiscally conservative stance bodes well for
German bonds, analysts said.
"We're still a long way from national elections, but the
impression we've had from recent polls is that support for the
CDU is rising and support for the SPD is weakening," said
Antoine Bouvet, rates strategist at Mizuho.
The SPD had surged ahead of the CDU in the polls after it
named former European Parliament President Martin Schulz as
leader and candidate for chancellor in January. But his impact
has faded in recent months.
"Quite importantly for Bunds, Merkel is seen as a lot less
likely to give in on subjects such as a euro zone budget and
domestically, she is also less keen on using the budget surplus
to kick start the economy," said Bouvet.
Germany's 10-year Bund yield stood at 0.41 percent
, up 1 bps on the day but down from seven-week
highs hit last week at 0.46 percent.
With French peers 2 basis points higher on the day
, the gap between French and German bond yields
widened to around 46 bps from 44 bps on Friday.
The German/Italian 10-year bond yield spread,
was also a touch wider at around 187 bps.
Political stability in Germany contrasted with the prospect
of uncertainty in neighbouring Austria, where a snap election is
on the cards.
On Sunday, Austria's foreign minister took over as leader of
the country's main conservative party and called for a snap
parliamentary election that centre-left Chancellor Christian
Kern admitted he could not prevent.
An early election would give the far-right Freedom Party,
currently leading in opinion polls, a good chance of entering
national government less than a year after its candidate lost a
That could renew concerns about the grip of
anti-establishment parties in Europe just as the election of
centrist Emmanuel Macron as France's new president bought some
relief to markets.
"We've had some noise in recent days in Austria, which could
become the next political theme in the euro area," said
Commerzbank rates strategist Rainer Guntermann.
For Reuters 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
(Reporting by Dhara Ranasinghe; Editing by Toby Chopra)