* Euro zone periphery government bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds quote, updates prices)
By Olga Cotaga and Yoruk Bahceli
LONDON, Jan 27 (Reuters) - Italian and Greek debt outperformed on Monday, following the far-right League’s failure to win a local election in Italy and an upgrade to Greece’s credit rating.
In Italy, Salvini had campaigned relentlessly for Sunday’s regional election in Emilia-Romagna since the start of the year, seeking a shock victory that he hoped would bring down the national coalition government.
Political uncertainty had spooked markets late last year, leading Italian debt to sell off sharply.
The 10-year yield in Italy sunk as low as 1.03% on Monday, its lowest since Nov. 1, and was last down 19 basis points on the day, its biggest daily fall since August.
The spread between German and Italian 10-year government bond yield - a key gauge of risk - shrank to its tightest since Oct. 28. It was last at 141 bps.
The spread could tighten to 120 basis points, levels last seen in mid-2018, Goldman Sachs said.
In Greece, Fitch Ratings upgraded the country’s credit rating on Friday to ‘BB’ from ‘BB-‘.. Greece’s 10-year yield fell 13 bps on the day and briefly touched its lowest since Oct. 31 at 1.176%, when it had hit a record low..
The credit rating agency said that Greece’s economic growth and fiscal prudence were leading to government debt remaining at sustainable levels.
Taking advantage of the momentum, Greece appointed banks for a new 15-year bond issue after its credit rating was upgraded by one of the three main rating agencies.
Commerzbank rates strategist Rainer Guntermann said Greek yields could go lower on the back of growing speculation that Greece’s credit rating will continue to improve and converge towards the level of Italian yields and possibly even towards an investment grade level, which would allow the European Central Bank to buy Greek debt.
The debt of the two, lower-rated sovereigns outperformed on a day where much safer German bunds also fell to their lowest in nearly three months on the back of growing concern that China’s coronavirus is more of a threat than anticipated.
“More of the European government bond market is being perceived as a valid rates product rather than as risky as it used to be,” said Mizuho head of rates strategy Peter Chatwell.
In Italy, with “political risks having being passed successfully for the centre-left, it’s also something which I think is likely to mean that BTPs are able to have a greater and stronger correlation with core bonds going forward,” Chatwell added.
The benchmark 10-year Bund yield fell 5 bps to as low as -0.39%, its lowest since early November.
So far, the coronavirus has killed 81 people in China, which accounts for 98% of the cases worldwide.
“The spreading ‘coronary angst’ leaves scope for the safety bid to extend,” Commerzbank’s Guntermann said.
($1 = 0.9014 euros)
Reporting by Olga Cotaga and Yoruk Bahceli; Editing by Mark Heinrich