* French data brings ECB outlook back into focus
* Some in the market remain nervous about EU elections
* Rating firms may await EU polls before upgrading periphery
(Updates prices, adds quotes)
By Marius Zaharia
LONDON, May 22 Yields on the euro zone's
lower-rated bonds stabilised on Thursday as expectations the
European Central Bank will ease monetary policy overshadowed
concerns about EU elections.
The focus moved back to the ECB after data showed French
business activity contracted in May, after forecasts had called
for an expansion. The German private sector's strong performance
continued, but it was not enough to cause a sell-off in the bond
The ECB has already signalled possible monetary easing
actions in June. Any weak economic data release revives the
debate over whether it will start printing money to fight
deflation and boost growth.
Spanish 10-year yields were 1 basis point
higher on the day at 3.03 percent. Italian yields
rose a similar amount to 3.22 percent.
They reversed a small dip after the French data, but
remained 20 bps or more above the record lows hit last week.
The recent rise in yields followed healthy debt sales in
Spain and Italy and some concern that a strong result for
Eurosceptic parties in this week's European Parliament elections
will weaken some governments domestically.
"I'm slightly nervous about the outcome of the EU elections,
but at the end of the day the name of the game is the ECB," said
Alan McQuaid, chief economist at Merrion Stockbrokers.
Spain sold 3.53 billion euros of five- and 10-year bonds
earlier in the day, the top end of the target range. Demand was
weaker than it had been at previous sales but was still almost
double the amount sold, giving Spain record-low borrowing costs.
"Spain remains one of the best performers in terms of
fundamentals and structural reforms versus other periphery
countries," said Annalisa Piazza, a market economist at Newedge.
Last week, Spain sold 5 billion euros of inflation-linked
bonds and Italy sold 14.25 billion of debt. Both Spain and Italy
secured about half their funding programmes for this year.
Some strategists say the EU elections could destabilise some
of the euro zone governments at home.
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.
But BNP Paribas rate strategist Patrick Jacq said the
selling pressure was always going to be temporary as long-term
investors had not participated.
"Almost no real money account was involved in this selloff
in Europe," he said.
The political uncertainty may still make rating agencies
cautious when they decide on Friday on the ratings of Greece,
Portugal, Spain, France, the Netherlands and the UK.
"The political situation - you have to take that into
account as a ratings agency," said Elwin de Groot, senior market
economist at Rabobank. "It is better to wait for the outcome of
EU elections and see if stability is maintained."
(Editing by Nigel Stephenson, Larry King)