* German 10-year bond yield hits two-week high
* Italian bond yields down 6-9 bps
* Democrats seize U.S. House control in midterm elections
* Italian government wins no-confidence vote (Recasts, updates pricing)
By Dhara Ranasinghe
LONDON, Nov 7 (Reuters) - Germany’s 10-year government bond hit a two-week high on Wednesday as demand for risk assets was supported by the lack of big surprises from the U.S. mid-term elections.
The positive mood helped European stock markets to rally towards the close of trading as markets digested the results of Tuesday’s U.S. vote.
Germany’s 10-year government bond yield - seen as the region’s safe haven - rose to a two-week high of 0.46 percent .
Italy’s government bond yields, meanwhile, fell 4-6 basis points across a range of maturities and Italian stocks rose 1.42 percent after the government won a no-confidence vote in the upper house. The government would have had to resign had it lost the vote.
Italy’s 10-year bond yield was last down 7 bps at 3.34 percent.
Spanish bond yields pulled back from new lows later in the session after a Spanish court ruled that banks are not required to pay stamp duty on mortgages.
The rally helped to narrow the gap between Spanish yields and German bonds to its tightest in 3-1/2 weeks.
The decision of Spain’s Supreme Court late on Tuesday spares banks from potentially having to reimburse billions of euros to borrowers who for years have paid the tax themselves.
A recovery in the banking sector of so-called peripheral markets following the euro zone debt crisis has helped to boost sovereign bond markets in countries such as Spain and Portugal.
Spain’s 10-year bond yields pulled back to 1.61 percent, having fallen more than 4 basis points earlier in the session .
“There had been a concern in markets about the court ruling, so now this being met with relief,” said Commerzbank rates strategist Christoph Rieger. “Risk-on is also helping sentiment, and that’s following the U.S. election.”
U.S. President Donald Trump will face greater restraints on his presidency after Democrats won control of the U.S. House of Representatives in Tuesday’s mid-term elections.
The outcome was broadly as expected and did not alter the outlook for interest rate increases from the U.S. Federal Reserve, analysts said.
Yields on higher-rated euro zone bonds opened lower, tracking an overnight fall in U.S. Treasury yields, but they edged back up as stock markets in European rallied and the Spanish court ruling dented demand for safe-haven assets.
“There is a belief that the election results will prevent any future fiscal easing, which is helping U.S. Treasuries, but overall there is not much change,” said Peter Schaffrik, global market strategist at RBC Capital Markets.
New supply also weighed on the market. Germany sold 2.4 billion euros of 10-year bonds, with investors placing orders of 3.4 billion euros.
France, Spain and Ireland are due to sell some 14 billion euros of bonds between them on Thursday.
Reporting by Dhara Ranasinghe; Additional reporting by Virginia Furness; Editing by Kevin Liffey and Jane Merriman