LONDON: Spanish, Italian and Portuguese bond yields hit their lowest levels in at least six weeks on Wednesday as investors saw elections in southern Europe as producing no major policy upsets.
Greece's elections did not result in a hung parliament as many had expected, keeping Prime Minister Alexis Tsipras in power with a new mandate to pursue EU-prescribed reforms.
A vote in the Spanish region of Catalonia gave pro-independence parties the majority of seats in parliament but they did not achieve a clear mandate to push ahead with their secessionist goals. Meanwhile, market reaction to news of negative euro zone inflation remained muted.
On Sunday, Portugal will hold a parliamentary election where the risk of an inconclusive result remains high, although the ruling centre-right coalition has been ahead in polls in recent weeks.
The polls are encouraging investors, as many European policymakers and financial analysts have praised the current government for its reform efforts as part of the bailout deal.
"Latest opinion polls point to the status quo in Portugal, supportive for sovereign bonds," Nick Stamenkovic, bond strategist at RIA Capital Markets, told the Reuters Global Markets Forum.
"Portugal has followed in Spain's footsteps by introducing a variety of fiscal and structural reforms," he said. "Italy is finally responding but it is a slow process."
He saw scope for peripheral bonds to outperform top-rated German Bunds in the fourth quarter, particularly if the ECB extends its bond-buying stimulus programme.
Portuguese 10-year bond yields fell to their lowest levels since mid-August at 2.42 percent.
Spanish yields bounced off their lowest in almost two months to reach 1.90 percent, while Italian yields dropped to 1.73 percent, after bouncing off a low unseen since mid-May.
They were all 1-2.5 basis points down on the day, with lower-rated debt outperforming German Bunds, whose yields were steady at 0.59 percent.
Morgan Stanley strategists recommended that investors be "cautious" on Portuguese bonds due to the risk of a hung parliament and as a rating upgrade to investment grade seemed to be already in the price.
The weakness in Bunds came as stocks rebounded from 2015 lows on the back of a Chinese tax cut on small cars, while miner Glencore rallied after saying it had no solvency issues.
Euro zone flash September inflation was minus 0.1 percent, well below the ECB's target of just under 2 percent and below a Reuters poll estimate of zero.
Investors had been prepared for a negative reading after below-forecast inflation data in Spain and Germany on Tuesday.
A key gauge of the market's long-term inflation expectations was held near Tuesday's seven-month lows.
The euro zone five-year, five-year breakeven forward, which shows where investors expect 2025 inflation forecasts to be in 2020, fell to 1.56 percent on Wednesday, its lowest since February.
Investors in 10-year Bunds have seen a return of 2.9 percent in dollar terms in the third quarter of 2015 but have lost almost 7 percent in the year so far.
Italian 10-year debt has returned 6.5 percent since the end of June, more than any other major asset in a selection tracked by Reuters.
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