* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Virginia Furness
LONDON, May 20 (Reuters) - Austrian government bond yields held firm on Monday after a scandal prompted Chancellor Sebastian Kurz to pull the plug on his coalition with the far right at the weekend, raising the chances of a snap election.
The government collapsed after vice chancellor and Freedom Party leader Heinz-Christian Strache resigned after he was caught on video offering to fix state contracts with a woman posing as a Russian oligarch’s niece.
Austrian stocks fell 0.9 percent, while Austria’s 10-year benchmark bond yield had risen around two basis points in early trade to 0.23%, pulling back from 2-1/2 year lows touched on Friday. Austrian debt largely tracks safe-German Bunds, which was stable on Monday.
The coalition’s downfall just a week before European Parliament elections is a blow to one of the most successful of the anti-immigrant, nationalist parties that have surged across the continent and which aim to make big gains in the vote.
“Now right-wing parties are coming under pressure and Austria’s tax policies were driven by the chancellor, so now the fear of a more populist rising is being alleviated to some degree,” said ING rates strategist Benjamin Schroeder.
Austria’s 10-year bond yield has tracked that of the German Bund which fell to 2-1/2 year lows last week on escalating trade tensions between China and the United States, Italian posturing ahead of the U.S. election and poor progress in Brexit talks. It was last seen slightly up to -0.097.
Trade tensions ratcheted up again on Friday, pushing U.S. Treasury and core euro zone bond yields slightly lower as traders sought safety in high-quality assets.
Italian government bond yields edged lower after another weekend of noisy rhetoric from Matteo Salvini, leader of its far-right League party.
Short-dated Italian bond yields were around four basis points lower at 0.59% for the two-year while its 10-year bond yield fell two basis points to 2.65%.
Comments from Italy’s economy minister Giovanni Tria that the government is firmly committed to preserving financial stability went some way to temper market concerns after Salvini said Italy would breach EU rules on spending.
This month’s European elections will shake up the continent, leading to a relaxation of budget rules and influencing the choice of the next European Central Bank chief, Italian Deputy Prime Minister Matteo Salvini said on Friday.
Analysts expect plenty more rhetoric ahead of the vote.
ECB policymaker Klaas Knot said in an interview published by Italian daily Corriere della Sera on Sunday that inflation in the euro zone is not at the level the European Central Bank wants.
Euro zone prices rose by 1.7 percent year-on-year in April from 1.4 percent in March, according to EU statistics agency Eurostat. (Reporting by Virginia Furness; Editing by Catherine Evans)