LONDON: Italian borrowing costs rose from fortnightly lows on Tuesday but euro zone bond markets largely held steady after
encouraging business surveys from Italy and Spain.
Spain's service sector grew at its fastest pace in three months and growth in Italy's services accelerated in May after a recent slowing trend, surveys showed on Tuesday.,
This provided some relief to markets still battered from last week's volatility, when political concerns drove one of the biggest selloffs in Italian government debt since the euro zone debt crisis of 2010-2012.
Some analysts had worried the establishment of Western Europe's first anti-establishment government, made of a coalition of Italy's 5-Star and League parties, could hit business sentiment and cause further sell-offs.
But Investec economist Philip Shaw said the causal links were not always that clear.
"Market movements don't always equal movements in the economy, so it's perfectly feasible for economic data to uncouple itself from financial markets," he said.
It was too early to gauge the impact of the new government's planned policies, he added.
"Whether the tax cuts and additional spending plans will outweigh the negatives of the effect on public finances and the confrontational stance towards the EU, I would be wary of saying that," he said.
Italian government bond yields were higher on the day, with 10-year yields rising 2.5 basis points to 2.58 percent , but were still close to fortnightly lows hit Monday and well below last week's high of 3.388 percent.
The closely-watched Italy/Germany bond yield spread was at 217 bps - last week it had stretched beyond 300 bps.
Most other euro zone bond yields were flat on the day, with 10-year German Bunds, the benchmark for the region, unchanged at 0.41 percent.
Data showed Monday that the European Central Bank had slowed its purchases of Italian government bonds last month, just as investors were offloading them on fears of a eurosceptic government taking power in Rome.
Market participants will also be keeping an eye on a speech by ECB President Mario Draghi on Tuesday afternoon for any indication of how the political developments in southern Europe may affect monetary policy.
Spain also saw a change of government last week, with socialist Pedro Sanchez replacing conservative Mariano Rajoy. Investors assessed the likelihood of another election there as low, which kept a lid on volatility.
S&P Global said on Monday that the appointment of the new government in Spain has no immediate effect on the country's sovereign rating.
Elsewhere Slovakia is preparing for a possible ultra-long bond sale, having announced a mandate for a 10-year and potential 50-year euro bond.
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