May 26, 2014 / 8:06 AM / in 4 years

Italian yields fall after Renzi's party wins EU vote

* Investors relieved Renzi’s party leads in EU vote

* French yields steady, market shrugs off National Front win

* Focus on fact pro-EU parties dominant in parliament (Adds detail, analysts’ comments)

By Emelia Sithole-Matarise

LONDON, May 26 (Reuters) - Italian bond yields fell on Monday as Prime Minister Matteo Renzi’s centre-left Democratic Party led the anti-establishment 5-Star Movement in European parliamentary elections, in an endorsement of his reforms.

Signs of the outcome in Italy were in sharp contrast to much of Europe where Eurosceptic nationalists scored stunning victories in elections in France and Britain on Sunday.

Critics of the European Union more than doubled their seats in a continent-wide protest vote against austerity and unemployment but bond investors focused instead on the fact that the majority of seats would be held by parties supporting the European Union.

Renzi’s party had a strong lead over the 5-Star Movement of former comic Beppe Grillo, early projections showed, easing niggling concerns that a poor result by the Democratic Pary would weaken Renzi’s drive for the swift reforms he promised when he took power.

Italian 10-year bond yields were 9 basis points down at 3.06 percent with Spanish equivalents 6 bps lower at 2.93 percent. Traders said intra-day moves could be exaggerated by thin volumes with UK and U.S. markets shut for holidays.

“In Italy we’ve seen voters endorsing the policies of Renzi whose party came out as the strongest party in these elections and this seems to be taken very positively by the market,” said Christian Lenk, a fixed income strategist at DZ Bank.

“We have not seen spectacular outcomes in terms of Eurosceptic parties in the weaker countries except for Greece ... and that seems enough to draw investors back.”

Greek 10-year yields were 2 bps lower at 6.51 percent after the anti-austerity Syriza movement of Alexis Tsipras won the vote but failed to deliver a knockout blow to the government of Prime Minister Antonis Samaras.

French yields were flat at 1.82 percent with the market shrugging off for now the anti-euro and anti-immigration National Front’s triumph at the weekend polls and focusing instead on the balance of power in the EU parliament which still lies with the pro-EU parties.

“We doubt that the outcome will result in a marked spread widening, but the performance of French government bonds will be watched closely today with risk of underperformance,” Commerzbank strategists said in a note.

With the EU vote out of the way, investors were now focusing on the European Central Bank’s policy meeting next week at which it is expected to announce new stimulus measures, further supporting lower-rated euro zone bonds. (Editing by Alister Doyle)

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