November 11, 2019 / 8:31 AM / 4 months ago

Euro zone bond yields steady, Spain holds ground after uncertain election

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, Nov 11 (Reuters) - Spain’s government bond yields held their ground on Monday, after an election at the weekend delivered a deeply riven parliament and set the stage for difficult talks to form a new ruling coalition following a surge in support for the far-right.

Spain’s far-right Vox party more than doubled its number of lawmakers in Sunday’s election — the country’s fourth national election in four years.

The most likely outcome appeared to be a minority Socialist government after the Socialists of acting Prime Minister Pedro Sanchez finished first but with fewer seats than in the previous ballot in April. The bigger question would be who its allies could be and how long such a government could last.

In early trade, Spain’s 10-year bond yield was flat at 0.39% , leaving the gap over safer-German bond yields at 64 bps — a touch wider from late Friday levels.

So far, political uncertainty has had a limited impact on Spanish bonds, which have been supported by a relatively firm economy and European Central Bank stimulus measures although analysts warned of weakness ahead.

“The path to a coalition government is still unclear with this result,” said Peter Chatwell, head of rates strategy at Mizuho in London.

“We expect our trades geared towards Spanish weakness to perform, given the lack of election uncertainty premium that was priced into Spanish bonds.”

Most 10-year bond yields across the euro area were little changed on the day, holding below highs hit on Friday as world risk sentiment took a hit following an escalation of violence in Hong Kong and uncertainty over whether the United States and China could end their damaging trade war.

The yield on Germany’s 10-year bonds, regarded as one of the safest assets in the world, was flat on the day at -0.27% and down from 3-1/2 month highs hit on Friday. (Reporting by Dhara Ranasinghe; Editing by Simon Cameron-Moore)

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