By Nigel Stephenson and Yumna Mohamed
LONDON, June 28 (Reuters) - Investors sought out lower-rated euro zone bonds on Tuesday, venturing from the safety of German benchmarks and betting on action from the European Central Bank to shore up the bloc after Britain's vote to leave the European Union.
Ten-year yields in Spain, Italy and Portugal all fell more than 8 basis points while yields on German Bunds, which hit a record low on Friday as investors sought shelter in the lowest risk assets, rose for the first time in a week.
Traders were looking to a meeting of EU leaders for more clarity on the next steps after the shock result of last Thursday's UK referendum.
Italian Prime Minister Matteo Renzi said on Monday that Brexit could be a great opportunity for Europe and there have been signs that Brexit may provide impetus to tackle some of its long-standing problems.
But with economists forecasting one outcome of the vote will be lower growth and inflation in the euro zone, some in markets were also expecting further action from the ECB to mitigate the impact.
The ECB's favoured measure of markets' long-term inflation expectations, the euro zone five-year, five-year breakeven forward rate touched a record low below 1.28 percent, ever further from the ECB's inflation target of just under 2 percent. Analysts said this increased the chances of more monetary stimulus from the central bank.
Bonds issued by the lower-rated countries on the euro zone's southern periphery have been big beneficiaries of the ECB's 1.74 trillion quantitative easing bond-buying scheme.
"If we assume that the UK vote will eventually fuel lower growth, lower inflation in the euro zone, then it makes sense to expect that the ECB will deliver more and more means maybe more QE, more rate cuts," said Patrick Jacq, Europe rate strategist at BNP Paribas.
ECB President Mario Draghi will join the EU leaders' meeting in Brussels.
Spanish 10-year yields fell more than 8 bps to as low as 1.369 percent, its lowest since April 2015. This followed a 15 bps fall on Monday, the biggest one-day fall in two years, after electoral gains for the centre-right People's Party raised the prospect of an end to political deadlock.
Italian 10-year yields fell 7.1 basis points to 1.36 basis points but Spain's outperformance took the gap between the two countries' 10-year yields to its tightest since July 2015.
Sources have told Reuters Italy is preparing to shield its banks from a share sell-off that set in after the British vote. The so-called doom loop between highly-indebted banks and sovereigns is regarded as one of the euro zone's key vulnerabilities since its debt crisis.