January 10, 2017 / 12:45 PM / 7 months ago

UPDATE 2-Euro zone yields fall as politics outweigh supply expectations

(Adds Portugal bond sale, updates prices)

By Abhinav Ramnarayan

LONDON, Jan 10 (Reuters) - Euro zone bond yields dipped on Tuesday as concerns that Britain faced a "hard Brexit" when it leaves the European Union and the prospect of unpredictable elections in major European economies outweighed inflation and supply expectations.

Yields have been rising in the single currency bloc since the start of the year as strong economic data has increased expectations for growth and inflation. The prospect of a traditionally busy January of government borrowing have also pushed yields up as investors make room for new bonds.

However, some of these moves reversed after comments by British Prime Minister Theresa May fuelled expectations of a "hard Brexit" without access to the EU's single market and increased demand for safe-haven assets.

"Brexit is due to be triggered in March, and this is a foretaste of that, and it's also a reminder of other risk events such as elections in France and Italy," said ING strategist Martin van Vliet.

There is also concern that after the UK's vote last June to leave the EU, similar anti-establishment sentiment lead to victories for anti-EU candidates in elections this year.

Votes are due in France, Italy and Germany, the region's three biggest economies.

These concerns tend to boost demand for safe-haven assets such as euro zone government bonds.

Germany's 10-year Bund yields shed 2 basis points (bps) to 0.27 percent after the sale of 10-year inflation-linked bonds, coming off Monday's three-week high of 0.325 percent.

The market showed its appetite for long-dated euro zone bonds on Tuesday, with the Netherlands and Austria selling 30-year debt via auctions without a noticeable effect on outstanding issues.

On Wednesday, Germany is to auction 5 billion euros of new benchmark 10-year bonds. The German 10-year bond is also considered a benchmark for euro zone government debt.

The existing benchmark, which matures in August 2026, already has a hefty 25 billion euro outstanding size, large even by German standards, said van Vliet.

Most euro zone 10-year yields were also around 2-4 bps lower, apart from Portugal's which rose 3 bps after IFR reported the country had hired banks to arrange a 10-year bond sale.

For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Abhinav Ramnarayan; Editing by Tom Heneghan and Richard Lough)

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