July 23, 2019 / 7:22 AM / a month ago

Euro zone bond yields' rise curbed by day of political news

* Euro zone yields rise after U.S. shutdown averted

* But rise capped by politics in UK, Italy and Spain

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, July 23 (Reuters) - Euro zone government bond yields edged higher on Tuesday after U.S. lawmakers averted a government shutdown, but a crowded calendar of political events in Europe capped the rise.

President Donald Trump and U.S. congressional leaders reached agreement on Monday on a two-year extension of the debt limit and federal spending caps that would avert a feared government default.

That pushed euro zone government bond yields higher in early European trade. But with the governments in the UK, Spain and Italy all in various stages of flux, the move was limited, and yields were still near the record lows posted recently.

Germany’s 10-year bond yield, the benchmark for the euro zone, was up a basis point but at minus 0.34% was near Monday’s two-week low and not far from the record low posted at the start of the month. Other euro zone bond yields were 1 to 2 basis points higher.

Upcoming events include a rumoured meeting between the leaders of the two squabbling parties who make up Italy’s coalition government, 5-Star Movement’s Luigi Di Maio and League’s Matteo Salvini.

“Investors are waiting to see whether this government will survive,” said DZ Bank strategist Daniel Lenz. “One possibility is that the coalition continues but both agree to replace (Giuseppe) Conte as prime minister, which would be a very bad signal.”

Conte is widely seen as a moderating influence on the anti-establishment Italian government, particularly in terms of its relationship with Brussels.

Italian government bond yields were 2 to 3 basis points lower on the day, but only after rising sharply on Monday.

In the United Kingdom, Boris Johnson is expected to be elected leader of Britain’s governing Conservative Party and the country’s next prime minister on Tuesday, tasked with following through on his “do or die” pledge to deliver Brexit in just over three months time.

Short-dated British Gilt yields are at a near- three-week low at 0.49% and not far from a one-and-a-half-year low at the start of the month as investors bet that a no-deal Brexit outcome would scupper any chances the Bank of England would raise interest rates.

In Spain, Socialist Pedro Sanchez will seek to become Spain’s Prime Minister in a confirmation vote, though far-left Podemor has demanded a bigger role in government to give him its backing.

Spanish government bonds were unchanged on the day, with 10-year yields flat at around 0.40%. (Reporting by Abhinav Ramnarayan, editing by Larry King)

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