Spanish and Portuguese bond yields hit record lows on Monday after European parliamentary elections showed pro-EU parties retained a strong majority, bolstering investor sentiment.
Though nationalist and far-right parties made significant gains, they were not as large as some investors had thought, and parties committed to strengthening the European Union held onto two-thirds of seats in the EU parliament.
"The populists gained significantly but from a market point of view, it wasn't as good a performance as was feared," DZ Bank analyst Rene Albrecht said.
"There's now a chance for a pro-EU grand coalition of liberals, social democrats and conservatives," Albrecht added.
Spain's Socialists also won most votes in European and local elections on Sunday, while Portuguese debt was boosted by ratings agency Fitch giving its sovereign credit rating a positive outlook. As a result, Spanish 10-year bond yields hit a record low of 0.803% while the Portuguese equivalent dropped to 0.951%, also its lowest on record, in thin trading due to holidays in Britain and the United States.
Far-right and nationalist parties did, however, make strong gains in the vote, anchoring German 10-year Bund yields at -0.147%, a 2-1/2 year low.
Yields were also pushed lower by US President Donald Trump's comments that suggested he wishes to re-examine trade relations with Japan, sparking further trade fears.
Elsewhere, Greek government bond yields dropped sharply, with the 10-year yield briefly hitting 3% for the first time, as Prime Minister Alexis Tsipras was left struggling for his political survival after his Syriza party was hammered in European Parliament elections.
"Syriza were starting to spread some gifts ahead of the elections and investors were starting to worry about Greece not achieving the primary surplus they need," Albrecht of DZ Bank said. "Now markets are hoping for a more conservative party who will be more disciplined on spending."
Italian bonds and stocks sold off sharply later in the session after it emerged that the European Union is considering disciplinary action on Rome for not reining in public spending.
Yields on Italian government bonds were up 11 to 14 bps across the board, with the benchmark 10-year yield rising 11 bps to 2.66 percent, the biggest daily rise in over a month. In addition to the potential fine, a strong showing from Matteo Salvini's League party over coalition partner 5-Star Movement would likely trigger speculation about a general election in the euro zone's third-largest economy.