LONDON: Spain’s borrowing costs slid over 10 basis points on Monday, as gains for the centre-right People’s Party in elections raised hopes of an end to the political deadlock and soothed peripheral markets sent reeling by last week’s Brexit vote.

The aftermath of Britain’s decision to leave the European Union continued to ripple through financial markets, with uncertainty fuelling demand for safe-haven German bonds.

But riskier southern European markets, seen as the most vulnerable to the political and economic fallout of Brexit, drew some solace from Sunday’s Spanish election results.

Spain’s second election in six months delivered a hung parliament for the second time, with acting Prime Minister Mariano Rajoy’s centre-right People’s Party (PP) winning 137 seats, short of the 176 needed for an outright majority.

But this was up from 123 in December — raising the prospect that the party will be able to form a minority government and end months of political uncertainty. Spain’s IBEX stock index rose 2 per cent, outperforming broader European stock markets.

Options to form a government include a centre-right pact between the PP and liberal newcomer Ciudadanos, a German-style grand coalition between the PP and the Socialists, or even a minority PP administration.

“Markets were braced for a more fractured outcome from the Spanish elections than we’ve seen,” said ING senior rates strategist Martin Van Vliet.

Spain’s 10-year bond yield slid more 10 basis points to 1.50 per cent, down more than 40 bps from seven-month highs around 1.93 per cent hit on Friday after the Brexit vote.

The PP was the only major party to increase its share of seats from December’s inconclusive poll, sapping the power of a wave of new parties which had fed on years of deep recession and public anger over corruption scandals within the major parties.

It was unclear whether Britain’s vote to leave the EU, which hit financial markets in indebted Spain particularly hard, led more people to vote for the conservative PP. However, the uncertainty and confusion sweeping Europe in the wake of Brexit will pressure politicians to reach a deal quickly.

Analysts said a swing back to mainstream parties was positive for political stability in Spain.

“While building a government still looks hard, the emergence of a left-wing government with extreme characteristics now looks less likely, which should alleviate market worries,” said Nordea chief fixed income analyst Jan von Gerich.

The rally in Spanish bond markets helped stabilise other peripheral markets. Italian and Portuguese 10-year bonds yields were flat to 2 bps lower, well off multi-month highs hit on Friday .

But amid the uncertainty triggered by the UK’s shock Brexit vote, investors held on to safe-haven bonds.

Germany’s benchmark 10-year bond yield was down 1.3 bps at minus 0.07 per cent, while 30-year bond yields tumbled 5 bps to 0.44 per cent.

Yields on British and US government bonds were down about 7-8 basis points.