LONDON: Spanish government bond yields dipped on Monday after the weekend's general election in which the Socialists emerged as the strongest party, a result seen by many in the market as pro-European.
Spanish Prime Minister Pedro Sanchez portrayed the result as a morale booster for the European Union as he looks set to regain power after his Socialists overcame a historic challenge by right-wing nationalists in Sunday's vote.
Coalition talks are set to begin this week, but market participants anticipate a coalition of left-leaning parties to take power in Spain as the most likely outcome.
"When you compare this to our worst fears for Europe, this is the most pro-European voting result you could have had," said Marie Owens Thomsen, global head of economic research at Indosuez Wealth Management.
"But also these parties are the more conciliatory to separatist forces, so I suspect Catalonia is going to remain an issue for the foreseeable future," she said, referring to the thriving independence movement in the northeastern province.
Spain's 10-year and 30-year bond yields, having dropped in the run-up to the vote on the back of pre-election polls, were down about two basis points on Monday.
Spain's bond yield spread over Germany was at its tightest level in nearly two weeks at 100 basis points and well off last week's highs of 110.6 bps.
That spread is heading towards the 95 bps mark which matches the tightest levels this year reached in early March.
Spanish government bonds have been one of the strongest performing in the region over the past two years as the country's impressive economic growth has pushed up its credit rating to the Single A category from two of the three main ratings agencies.
Safe haven German Bunds sold off, with the benchmark 10-year bond yield rising two basis points to around zero percent. Other better-rated euro zone government bond yields rose 1-2 bps on the day.
"The silver lining for Spain continues to be growth," Barclays said in a note.
"In 2019, Spain will still outperform other large euro-area economies Germany, France and Italy. Therefore, we think that markets will not react very negatively to the political uncertainty in the weeks ahead."
Elsewhere, an early rally in Italian bonds -- triggered by S&P Global's decision on Friday to maintain the country's sovereign credit rating two notches above junk -- proved short-lived.
Italy's 10-year bond yield was flat at around 2.58 percent, having dropped as much as five basis points to 2.53 percent in early trade.
Later in the week, inflation numbers for the euro zone, a U.S. Federal Reserve meeting and business surveys in Italy and Spain could all have an impact on markets.
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