Election fears curb boost from peripheral Europe bond upgrades

Fri May 23, 2014 3:48am EDT

* Low-rated bonds inch up after Greece, Spain upgrades

* Moody's verdict on France, Slovenia awaits

* Strategists say outlook shaky with elections, holidays

By John Geddie

LONDON, May 23 (Reuters) - Lower-rated peripheral bonds inched up on Friday with niggling EU election concerns curbing enthusiasm over the latest round of ratings upgrades.

Fitch lifted Greece's rating for the second time in a year on Friday, while Standard and Poor's followed through with a widely-expected upgrade on Spain.

Prices in peripheral bonds have stabilized after a sharp sell-off, but with EU election results set to be released on Sunday and ahead of long weekends in the UK and the US, trading volumes are tipped to be fairly subdued on Friday.

"The periphery has rallied off their lows but I'm not sure how much more mileage there is left in it," said Marc Ostwald, a strategist at Monument Securities.

Italian and Spanish 10-year yields opened 2 basis points lower at 3.03 and 3.22 percent respectively. Greece was 1 bps down at 6.51 percent, while Portugal and Ireland were unchanged at 2.85 and 3.87 percent.

Fitch praised Greece's improving fiscal track record as it lifted its rating to B from B- with a stable outlook. It becomes the most bullish agency on the country which defaulted just two years ago, although its rating is still five notches below investment grade.

Standard and Poor's brought its rating for Spain in line with Moody's, lifting it to BBB from BBB- based on its economic prospects. Fitch remains the most optimistic on Spain, with its rating of BBB+ one notch above the other two main agencies.

S&P also affirmed the Netherlands at AA+ with stable outlook. Moody's is scheduled to deliver its verdict on France and Slovenia later on Friday, with the former widely rumoured for a downgrade and the latter tipped for an upgrade.

In other positive signs for the periphery, Portugal's public sector deficit fell 11.3 percent in the first four months of the year to below the level forecast in the government's budget, the Finance Ministry said late Thursday. The fall was boosted by a 5 percent increase in tax revenues.

However, strategists are recommending investors to favour safe haven bonds on Friday ahead of EU elections which could destabilize some of the euro zone governments.

In Greece, a strong showing by anti-bailout parties may hurt an already-fragile coalition, potentially paving the way to national elections. In Italy, a poor result for Prime Minister Matteo Renzi's party might weaken his drive for the swift reforms he promised when he took power in a party coup.

"The short-term outlook ahead of the weekend still looks shaky...(German) Bunds look supported," said Commerzbank in a research note.

German 10-year bonds are unchanged at 1.36 percent, just above year-to-date lows, with monthly readings on the country's IFO business climate due out at 0800GMT. (Editing by Toby Chopra)

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