October 22, 2019 / 7:49 AM / a month ago

Euro zone government bond yields edge down before Brexit vote

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

By Yoruk Bahceli

LONDON, Oct 22 (Reuters) - Euro zone government bonds edged down on Tuesday, before a vote in British parliament crucial to determining whether the UK can leave the EU in an orderly way at the end of the month.

UK Prime Minister Boris Johnson faces two pivotal Brexit votes in the British parliament on Tuesday. Lawmakers will first vote on the Withdrawal Agreement Bill and then vote on the government’s tight 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.”

Ten-year government bond yields across the euro zone were down 1 basis point on the day . Germany’s 10-year yield was at -0.35%, near three-month highs.

Analysts say much of the optimism around Brexit is already priced in and expect subdued reactions. Euro zone government bonds sold off as the first signs of a Brexit deal emerged; the German 10-year bond yield has risen 19 bps since Oct. 10.

In addition, China and the United States made some progress in their trade talks, according to Chinese Vice Foreign Minister Le Yucheng.

Italian government bonds outperformed, the 10-year yield falling 2 basis points in early trading.

Italy began its BTP Italia inflation-linked bond sale to retail investors on Monday, and it has fared better than a similar bond last November, when demand was subdued by a row with the EU over Italy’s public finances. A successful sale would support Italian bonds, analysts said.

The European Commission has sent a letter to Italian authorities asking for clarification over its 2020 draft budget. Rome will reply by Wednesday.

Italy’s draft 2020 budget assumes a rise in its structural deficit of 0.1% of GDP. Under EU rules, it should fall 0.6% of GDP.

Analysts will also be keeping an eye on a European Central Bank lending survey due later on Tuesday. (Reporting by Yoruk Bahceli, editing by Larry King)

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