London: Peripheral bonds led Eurozone yields lower on Tuesday as dovish comments from Federal Reserve Chair Janet Yellen bought some solace to risk markets that have started to become unnerved by a looming referendum in the UK on European Union membership.
In a speech on Monday, Ms Yellen gave a largely upbeat assessment of the US economic outlook and said interest rate hikes were coming, but gave little sense of when.
Those remarks boosted European shares and demand for lower-rated or riskier bonds in southern Europe.
Italian, Spanish and Portuguese bond yields all fell around 3 basis points each, unwinding some of the previous day's rises.
"Fed Chair Yellen's latest dovishly interpreted speech is supporting risk markets," said Nick Stamenkovic, macro strategist at RIA Capital Markets.
On Monday, Italian bond yields notched up their biggest one-day rise in six weeks and Portuguese yields hit a three-week high as concern that Britain might leave the EU and a setback for Italy's government in municipal elections at the weekend brought political risks to the fore.
Peripheral bond markets are seen particularly vulnerable to Brexit risks, partly because lower-rated debt markets tend to suffer more during bouts of risk aversion.
"For a long time it seemed that markets were relaxed about Brexit risks and volatility was low and that is changing as the "Leave" campaign gains momentum and means anything that is seen as a risk asset is vulnerable," said DZ Bank strategist Daniel Lenz.
In a sign that markets are starting to price in the risk of the UK leaving the EU, the yield gap between southern European and top-rated German bonds has started to widen.
Portuguese 10-year yield spreads are near their widest level in about a month, while the Spanish/German yield gap is close to its widest in about three weeks.
Analysts say Brexit jitters and European Central Bank's asset purchases should bolster safe-haven German bonds.
Germany 10-year Bund yields were steady at 0.08 per cent, near Friday's more than one-year low of 0.065 per cent.
Data on Monday showed the ECB, faced with a scarcity of bonds for its bond buying programme, bought more German, French and Italian bonds than its rules dictate in May.
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