* 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 fresh comments)
By Marius Zaharia and Emelia Sithole-Matarise
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 anti-austerity fallout from 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.
"Clearly we had some weak data ... and the market is now
back to realising that the ECB is going to deliver something,"
said Jean-Francois Robin, global head of strategy at Natixis.
There was still some hesitancy to commit to big positions in
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 many in the market said selling pressure was always
going to be temporary as long-term investors had not
"We have held substantial positions in Spanish, Italian and
Portuguese bonds since the beginning of the year as we expect
continued economic improvement in southern Europe," said Martin
Harvey, fixed income manager at Threadneedle Investments.
"Given that the election results are unlikely to affect this
backdrop, we maintain holdings through the election."
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 Jeremy Gaunt)