LONDON (Reuters) - Portuguese, Italian and Greek bond yields rose on Thursday after a Greek government official said Prime Minister Alexis Tsipras would resign.
The move will clear the way for early elections on Sept. 20. Tsipras effectively lost his parliamentary majority after a rebellion by hardliners in his Syriza party who oppose a bailout agreement struck with international lenders.
Earlier on Thursday, Greece made a crucial debt repayment to the European Central Bank, using newly released funds, a government source said.
Italian 10-year yields traded as low as 1.77 percent earlier in the day but perked up on the Greek news, closing 2 basis points up at 1.83 percent.
Portuguese yields rose 12 basis points to 2.62 percent. Greek two-year bond yields rose 78 bps to 12.15 percent.
Spanish yields were flat at 2.0 percent but up from the day's lows of 1.94 percent.
"At first blush, this reaction looks possibly warranted owing to the concern that politicking will now replace politics - i.e. the passage of reforms will be put on the back burner as the electoral campaign kicks off," Rabobank rate strategists said in a note.
"This, in turn, will raise concern over Greece's ability to meet the legislative commitments attendant to its third bailout."
Earlier in the day, yields were sharply lower across the euro zone as tumbling oil prices pushed down inflation expectations, and minutes from the U.S. Federal Reserve's latest meeting showed policymakers remained nervous about raising rates for the first time in a decade.
Oil prices fell to near their lowest level since the global financial crisis of 2009, as investors staked bets on the euro zone returning to deflation in a year's time.
Lagging consumer prices and a weak global economy, compounded by a steady slowdown in China, were factors Fed policymakers said posed too big a risk to allow it to commit to an interest rate lift-off.
Meanwhile in Europe, analysts and investors have suggested these may even force the European Central Bank to extend its 1 trillion-euro bond-buying programme beyond its scheduled end in September 2016.
"The continued weakness in commodity prices is putting pressure on the likelihood or extent of any interest rate hikes, and increasing the possibility of making a policy mistake," said Morgan Stanley strategist Anthony O'Brien.
German 10-year yields - the euro zone benchmark and an asset considered a safe haven - stayed low after the news on Greece, trading 6 basis points down at a one-week low of 0.57 percent.
The move followed a sharp fall in U.S. Treasury yields, which have dropped around 10 bps since the minutes of the Fed's last meeting were released late Wednesday.
"Last night's FOMC minutes support the notion that the hurdle for September lift-off is not yet cleared - at least on the inflation count," said Commerzbank strategist Rainer Guntermann.
Only one Fed policymaker was ready to vote for a rate hike at the central bank's July meeting, while others agreed that improvements in the labour market showed the economy was nearing the point where interest rates should move higher.
But the uncertain outlook for inflation, with commodity prices tumbling, is muddying the waters.
Euro zone one-year inflation swap rates slid below zero for the first time since February, signalling that the euro zone could be headed back towards deflation.
(Reporting by Marius Zaharia and John Geddie; Editing by Angus MacSwan)
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