* Spanish, Italian govt bonds outperform higher-rated peers
* Draghi comments fuel optimism over euro zone economy
* Greek lawmakers pass austerity measures, pave way for aid
* Spanish socialist primary a cloud on political horizon
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, May 19 Investors switched from
high-rated euro zone government bonds to lower-rated Italian and
Portuguese debt on Friday as a positive economic and political
climate in Europe contrasted sharply with turmoil in the United
Earlier this week, euro zone bond yields dropped across the
board, tracking a move in U.S. Treasury yields on concerns over
U.S. President Donald Trump's recent troubles and its
implications for future policy in the world's biggest economy.
But on Friday, investors started focusing on the positives
in the euro zone, particularly after European Central Bank chief
Mario Draghi's optimistic comments the day before.
"Everything has turned upside down - European political
risks have faded, the economy is looking strong, while in the
U.S. everybody is worried," said DZ Bank strategist Daniel Lenz.
Trump struck a defiant tone on Thursday after days of
political tumult, denying that he had asked former FBI Director
James Comey to drop a probe into his former national security
adviser and decrying a "witch hunt" against him.
The "transatlantic spread" between U.S. and German 10-year
government bond yields has fallen to 187 basis points, well off
its April peak of 216 bps.
This is a change from earlier this year, when U.S. yields
rose sharply on expectations that tax cuts and extraordinary
spending measures from Trump would boost the economy.
In Europe at the time, the UK's "Brexit" vote promoted
concerns that an anti-establishment wave would affect key
elections across the euro zone and threaten the bloc's future.
So far that hasn't happened, while as Draghi told Dutch
lawmakers on Thursday the euro area economic recovery is
becoming increasingly solid.
Euro zone growth has outstripped that of the U.S. so far
this year, data earlier this month showed.
In a classic "risk-on" trade, Italian and Portuguese 10-year
government bond yields fell 3 basis points each on Friday
morning, while the German equivalent rose slightly as did yields
on other high-rated bonds.
The Italy-German bond yield spread fell to an 11-day low at
175 bps, well off its 212 bps peak from earlier this year.
Also on Friday, European stocks were up 0.27 percent
while the euro rose 0.3 percent against the dollar.
In a further positive for the single currency bloc, Greek
lawmakers approved pension cuts and tax hikes on Thursday sought
by the country's lenders to unlock vital financial aid.
Greece's 10-year government bond yield was steady at 5.79
percent, close to recent lows hit since an agreement on bailout
reforms appeared to move closer.
A cloud on the euro zone political horizon, however, is
Sunday's Spanish socialist primary, the outcome of which could
determine whether Prime Minister Mariano Rajoy will be able to
see out his four-year term.
Spanish government bond yields appeared relatively
unaffected by this vote, but that could change, said DZ Bank's
"Markets often can only focus at one thing at a time, but if
(Pedro) Sanchez wins the vote, he could create problems for
Rajoy and then we could see Spanish bonds affected," he said.
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 Abhinav Ramnarayan; Editing by Andrew Heavens)