But an early rally in low-rated euro zone bond yields dissipated as concerns over what this might mean for the European Central Bank's ultra loose monetary policy stance came to the fore.

"Investors will now go back to the basics of watching the underlying euro zone economic and inflation data and what implications it may have for monetary policy," said Iain Stealey, a fixed income portfolio manager for JP Morgan Asset Management, one of the biggest bond investors in the world.

"The underlying GDP data is too strong for there to be 60 billion euros of (bond) purchases and though inflation numbers are below target, they are not low enough to justify a negative deposit rate," he said, referring to the ECB's bond-buying scheme.

Italy was the underperformer on the day, partly because it has been the biggest beneficiary of the ECB's bond-buying scheme. Italy is due to hold an election by May 2018, which could coincide with ECB tapering, though, at the margins, investors say there is an outside chance of a snap election before the end of 2017.

Italians are seen as more sceptical about the euro than the French, and the anti-euro 5-Star Movement leads many opinion polls ahead of the ruling Democratic Party.

"Macron's win now means Italian issues won't be obscured by French shadows," said Rabobank strategist Richard McGuire. "And we have the potential twin evils of Italy going to the polls early next year and tapering to think about at the same time."

Citi analysts forecast the Italy-German 10-year bond yield spread - currently at 180 bps - could go as high as 300 bps in the first quarter of 2018.

Italy's 10-year government bond yield rose 3 basis points to 2.20 percent.

High-rated government bond yields were 1-3 bps lower while Spanish and Portuguese 10-year borrowing costs were flat to 1 bp higher.

RALLIED SUBSTANTIALLY

ING strategist Martin van Vliet said there may also be some "buy the rumour, sell the fact" trades taking place, with Southern European government bonds having rallied substantially in the days leading up to the vote.

German 10-year government bond yields were lower 3 basis points to 0.39 percent on Monday, having risen over 25 basis points in the last three weeks.

Earlier this month, data showed euro zone consumer inflation rose to 1.9 percent in April, beating forecasts of 1.8 percent, and close to the ECB's target of just below 2 percent.

Preliminary estimates showed last week the euro zone economy started the year with robust growth that outstripped that of the United States and set the stage for a strong 2017.

After the first round of the French election, sources on and close to the ECB Governing Council told Reuters many rate-setters see scope for sending a small signal in June towards reducing monetary stimulus.

On Monday, data showed investor sentiment in the euro zone hit its highest level in almost a decade in May, improving more than expected thanks to a strong assessment of the current economic situation and expectations that political uncertainty will diminish.

With German Chancellor Angela Merkel gaining momentum ahead of the German federal election in September, political risk appears to have diminished for the rest of the year, said Stealey, with Italy's election likely to be called next year.

Merkel's conservatives won a decisive victory over their Social Democrat (SPD) rivals in a vote in Germany's northern state of Schleswig-Holstein on Sunday, boosting her prospects of winning in September.

(Reporting by Abhinav Ramnarayan, editing by Nigel Stephenson and Janet Lawrence)