* Spain's 10-year bond yield hits all-time low
* Socialists' Sanchez quits as leader
* Lifts hopes that political stalemate close to end
* Attention turns to risks facing Italy, Portugal
(Updates prices for close)
By Dhara Ranasinghe
LONDON, Oct 3 Spain's 10-year bond yield touched
a record low on Monday, outperforming most other euro zone peers
on hopes that the resignation of the Socialist party leader at
the weekend would pave the way for the formation of a new
Low-rated euro zone debt started the final quarter of the
year broadly backfoot as the focus turned to looming risks in
the peripheral euro zone states. There were also renewed worries
about the fallout from Brexit on news that Britain will trigger
the process to leave the European Union by the end of March.
The leader of Spain's Socialists, Pedro Sanchez, resigned on
Saturday after losing a vote triggered by a party revolt, a step
that could end a nine-month political deadlock.
Sanchez had been in a stand-off with acting Prime Minister
Mariano Rajoy's People's Party, frustrating efforts to form a
government after two elections left the conservatives with the
most votes but shy of a majority.
The Spanish constitution allows for another attempt to form
a government by the end of October and if that is unsuccessful,
a third election will be called in December.
"It's not clear that the Socialist party will abstain in
another vote by Rajoy to form a government, but markets have
taken the resignation of Sanchez well," said Mizuho strategist
Spain's 10-year bond yield fell almost 2 basis points to a
record low at 0.865 percent, before pulling back
to 0.91 percent as Italian and Portuguese bonds came under
Italian 10-year bond yields were 5 bps higher on the day at
1.25 percent IT10YT-TWEB, while Portuguese yields rose 4 bps
to 3.39 percent.
German Bund yields were up 2 bps at minus 0.10 percent
with trading subdued due to a public holiday in
A decision by ratings agency S&P to affirm Spain's BBB+
credit rating with a stable outlook late on Friday helped to
lift sentiment towards Spanish bonds since some banks had
highlighted the risk of a downgrade to the outlook.
S&P said the stable outlook reflected a view that momentum
in the economy would continue.
Spanish manufacturing activity grew in September at the
fastest rate since April, a survey showed on Monday, with new
orders expanding rapidly.
The country's relative economic strength and hopes that the
political impasse will be resolved soon contrasts with growing
concerns about neighbouring peers Italy and Portugal.
Italian Interior Minister Angelino Alfano at the weekend
looked to calm fears about political stability, saying the
government will not resign whatever happened in a forthcoming
referendum on constitutional reform.
Italy's Baa2 rating is due for a review by Moody's on Friday
and Commerzbank says that the stable outlook could be at risk.
In Portugal, jittery markets are counting down to a review
on Oct. 21 by DBRS, the last major ratings agency to give
Portugal the investment grade rating it needs to qualify for the
European Central Bank's bond-buying programme.
DBRS warned in August that pressures were building on
Portuguese bond yields rose about 28 bps in September,
posting their biggest monthly rise sine June 2015.
"Portugal ended Q3 on a weak footing and it's now October
and we have a key DBRS review coming up," said Commerzbank rates
strategist David Schnautz.
(Reporting by Dhara Ranasinghe; editing by Mark Heinrich)