(Updates prices into close, adds comments)
By Marius Zaharia
LONDON, Sept 21 (Reuters) - Greek bond yields fell on Monday after Syriza’s unexpectedly clear election win reassured investors the country’s bailout would happen, though uncertainty before polls in Spain and Portugal saw their bonds underperform.
Portuguese yields briefly hit one-month lows after Standard & Poor’s lifted the country’s credit rating on Friday. However, they rose to trade 4 basis points higher on the day , as investors worried about next month’s Portuguese election used the rally as an opportunity to sell.
Greek yields fell after voters gave leftist Alexis Tsipras and his party a second chance to tackle Greece’s problems. A senior Syriza source said debt negotiations would top the new government’s agenda.
Yields on French bonds edged higher after Moody’s cut France’s rating on Friday by one notch to Aa2, citing continued weakness in the medium-term growth outlook.
Spanish and Italian bond yields dipped early in the day as the Greek election improved appetite for the euro zone’s lower-rated bonds.
Tsipras regained power even though he was abandoned by party radicals last month after he agreed to demands for austerity to win a euro zone bailout.
Syriza campaigned on a pledge to implement the 86 billion- euro ($97 billion) bailout while promising measures to protect vulnerable groups from some aspects of the deal.
The pledge is a U-turn from the campaign which brought Syriza to power in January on an anti-austerity ticket. Months of open bickering with European leaders saw Greece flirting with an exit from the euro zone.
Yields on 10-year Portuguese bonds, which were upgraded by one notch to BB+ but are also the most sensitive to events in Greece, hit a one-month low of 2.47 percent, before bouncing back to 2.59 percent.
Portugal faces the prospect of political stalemate undermining its recovery, with neither of its main parties strongly placed to achieve a majority government at Oct. 4 parliamentary elections.
“(S&P) cited the improving economic picture and increased signs of fiscal consolidation, but there is an election ahead in October so that may be causing some caution for some investors,” said Nick Stamenkovic, bond strategist at RIA Capital Markets.
The upgrade leaves Portugal just below investment grade and it does not trigger automatic buying from ratings-sensitive funds. But it still has an impact on sentiment.
Italian and Spanish yields rose 2.8-4.5 bps to 1.81 percent and 2.00 percent, respectively.
In Spain, investors worry a win for secessionists in a regional election in wealthy Catalonia on Sunday could trigger political instability.
Greek 10-year yields fell 3.2 bps to 8.23 percent, while two-year yields fell 47 bps to 10.32 percent.
“The debt issue will linger for quite a while, but the odds are greatly in favour of the next Greek government staying on track for at least several months,” said Erik Nielsen, group chief economist at UniCredit.
“Yes, the ‘big Greek trade’ is behind us, but the GGBs are still attractive. My money is on at least a 200 bps tightening before year-end.”
Others were more cautious. UBS analysts said there was still a 20-30 percent chance of Grexit over the next 12 months, because long-term implementation of the bailout would be a challenge.
German Bund yields were up 1.1 bps at 0.68 percent, having fallen more than 10 bps on Friday after the Federal Reserve kept interest rates on hold.
French yields were up at 0.98 percent. (Additional reporting by Lisa Barrington; Editing by Larry King)