October 29, 2019 / 11:26 AM / 2 months ago

UPDATE 2-German Bund yield edges down from 3-month highs

* Bund yield off 3-month high

* Focus turns to Fed meeting, ECB QE, tiering

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds latest Brexit news, updates prices)

By Dhara Ranasinghe

LONDON, Oct 29 (Reuters) - Germany’s benchmark 10-year bond yield edged off three-month highs on Tuesday as investors waited for a fresh steer before pushing borrowing costs any higher.

Government bond yields across the single currency bloc rose sharply on Monday after the European Union granted Britain a Brexit extension and as upbeat news on U.S.-China trade talks boosted optimism in world markets, denting safe-haven assets.

With the U.S. Federal Reserve set to conclude a two-day policy meeting on Wednesday, trading was largely subdued. The Fed is widely tipped to trim interest rates by 25 basis points, the third cut this year.

“The Fed is by far the most important factor now,” said Antoine Bouvet, senior rates strategist at ING.

“There is a gap in expectations over whether the Fed will cut rates and pause or signal further easing because of a deterioration in the data.”

Most 10-year bond yields across the bloc were around three basis points lower on the day .

Germany’s 10-year Bund yield dipped to -0.35%, off a three-month high touched on Monday around -0.32%.

It is up 22 basis points so far in October and set for its biggest monthly jump since early 2018, largely driven by optimism that Britain will avoid a no-deal Brexit.

That in turn has helped ease concern about the global growth outlook, pushing longer-dated 30-year bond yields back into positive territory and steepening the German yield curve.

“There is a feeling that yields have gone far enough for now,” said Peter McCallum, rates strategist at Mizuho.

Indeed, with Brexit uncertainty likely to be replaced by election uncertainty in Britain, selling in safe-haven bond markets would likely be limited for now, analysts said.

Britain was heading towards a general election after Prime Minister Boris Johnson’s bet on breaking the Brexit impasse with an early ballot gained backing from opposition parties on Tuesday.

Lawmakers could still impose significant amendments on Johnson’s bill and he could withdraw it if parliament votes to lower the voting age or allows European Union citizens to vote because such moves will mean a six-month delay, his political spokesman said.

The resumption of European Central Bank asset purchases on Wednesday was expected to support euro zone bond markets in the near term.

Wednesday will also see the launch of the ECB’s new tiered rate to help mitigate the side effects of negative interest rates on the banking sector.

Banks have been raising the rate at which they lend to each other over several months, anticipating that some cash will be withdrawn from the market and parked at the ECB when the new rate takes effect Oct. 30.

Elsewhere, the European Union’s euro economy commissioner Valdis Dombrovskis said on Tuesday that Brussels was not considering asking for changes to Italy’s 2020 budget.

Reporting by Dhara Ranasinghe with additional reporting by Yoruk Bahceli Editing by Mark Potter/Mark Heinrich

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