* Eyes on dual vote on Brexit in UK parliament
* Euro zone bond yields fall; Italy outperforms
* European Commission asks for clarity on Italian budget
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, updates prices)
By Yoruk Bahceli
LONDON, Oct 22 (Reuters) - Euro zone government bonds yields fell on Tuesday, before a vote in the British parliament that may determine whether the UK can leave the European Union in an orderly way at the end of the month.
UK Prime Minister Boris Johnson faces two Brexit votes on Tuesday: one on a Withdrawal Agreement Bill and one on the government’s proposed timetable for approving the legislation.
“It’s too close to call whether there will be a majority,” said DZ Bank rates strategist Daniel Lenz. “This may be also very much reflected by market developments, that you don’t see major movement to one or the other side.”
Johnson told parliament that if it delayed his Brexit legislation he would abandon his attempt to ratify the deal to exit the EU and push for an election instead.
Ten-year government bond yields across the euro zone were down around 3 basis points on the day . Germany’s 10-year yield was at -0.378%.
Analysts say much of the optimism around Brexit is already priced in and expect subdued reactions. The German 10-year bond yield has risen 17 bps since Oct. 10.
“The market is pricing a lot of optimism, a) on the no-deal Brexit being taken off the table tonight, b) on the deal being approved tonight. Therefore, there’s not much room for rates to move higher,” said ING senior rates strategist Antoine Bouvet.
Separately, source told Reuters on Tuesday that Germany is set to pick university professor Isabel Schnabel to join the European Central Bank’s executive board.
“Her reputation suggests she is fairly continuous with mainstream policy thinking in Germany and German institutional views on monetary policy. We’d expect that to continue,” said Sunil Krishnan, head of multi-asset funds at Aviva Investors.
The ECB meets on Thursday for Mario Draghi’s final policy meeting as the central bank’s president.
Italian government bonds outperformed, the 10-year yield falling 7 basis points to 1.02% and putting it on course for its best day in October.
“Think of BTPs at the moment as being bunds with greater volatility. So when the bund market sells off, BTPs tend to sell off more,” ING’s Bouvet said.
The European Commission has sent a letter to Italian authorities, asking for clarification over their 2020 draft budgets. Rome will reply by Wednesday.
A major conflict is not expected, unlike last year when the Commission sent back Italy’s draft budget and asked for a new one, sparking a surge in Italian yields.
Italy’s draft 2020 budget assumes a rise in its structural deficit of 0.1% of GDP. Under EU rules, it should fall to 0.6% of GDP.
Italy’s debt rose to 138.0% of gross domestic product in the second quarter of the year, up from 136.6% in the previous three months, in further violation of EU requirements.
Analysts said a successful sale of BTP Italia inflation-linked bonds to retail investors supported Italian bonds. (Reporting by Yoruk Bahceli; Additional reporting by Tommy Wilkes and Sujata Rao; Editing by Larry King)
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