LONDON: Peripheral government bonds led euro zone yields down on Monday, propelled by last week's monetary stimulus from the European Central Bank, which is seen as benefitting southern European economies the most.
German bonds, which initially underperformed their peers, were also in focus a day after voters punished Chancellor Angela Merkel's conservatives in three regional elections.
Ten-year bond yields in southern European markets fell 3-6 basis points (bps), with Portugal's 10-year bond yield at 2.77 percent and within sight of 5-week lows hit after last Thursday's ECB meeting.
"It takes time for the impact of the ECB's easing to come through and it does look like the package was geared towards peripheral Europe, which should be supported," Commerzbank interest rate strategist, David Schnautz, said.
In particular, an increase in monthly asset purchases and an offer to pay banks to lend to firms is seen as benefiting southern European economies.
Against this backdrop, yield spreads between peripheral bonds and top-rated Germany have tightened.
The yield gap between Italian and German 10-year bonds was at its narrowest for about two months at 103 bps. The Portuguese/German 10-year yield gap was 250 bps, its tightest level for more than a month.
POLITICAL RISK
Merkel's Christian Democrats (CDU) lost ground in all three regional states holding elections on Sunday as voters gave a thumbs-down to her refugee policy and turned in droves to the anti-immigrant AfD.
German bonds initially underperformed but 10-year yields were last down 2 bps at 0.26 percent, in line with a fall in their French peers.
German bonds are still seen as one of the safest assets in the world, but analysts said the election results did introduce an element of political risk.
"The immigrant crisis continues to impact politics and also the Brexit debate," KBC strategist, Piet Lammens, said, referring to a referendum on European Union membership that will take place in Britain in June. "It is hard to see how markets price in these risks, but there is a tail risk and it has become a bit fatter," he said.
Elsewhere, Finnish bonds showed little immediate reaction to Fitch's downgrade of Finland's credit rating to AA+ from AAA.
Austrian yields remained lower after news that the province of Carinthia had failed in its bid to avert a threat of insolvency by buying back bonds of the "bad bank" Heta Asset Resolution for less than the face value it had guaranteed.
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