March 29, 2019 / 11:13 AM / 3 months ago

UPDATE 3-German bond yields dip after UK lawmakers reject Brexit agreement

* Core euro-zone bond yields dip 2.5 bps after vote, before pairing gains

* German Bund yields down over 20 bps in March

* Biggest monthly falls since June 2016

* EZ bond yields higher on U.S.-China trade talk hopes

* But key day for Brexit prevents deep selloff

* Euro zone periphery govt bond yields (Updates pricing)

By Virginia Furness and Dhara Ranasinghe

LONDON, March 29 (Reuters) - German government bond yields dipped after UK lawmakers rejected Prime Minister Theresa May’s Brexit agreement for the third time on Friday, plunging the UK into a period of uncertainty over its planned departure from the EU.

Germany’s 10-year government bond yield fell two basis points after the vote to trade near flat on the day at -0.07 percent, as investors focused on the ongoing-uncertainty that the vote indicates.

Britain’s withdrawal from the European Union was thrown into turmoil on the very day it was originally supposed to leave the bloc. It is now unclear how, when or even whether it will indeed exit the EU.

European Council President and summit chair Donald Tusk said EU leaders would meet on April 10 to discuss Britain’s departure from the bloc.

“The market looks at a very short term horizon, so it will quite often prefer more certainty in the near term, even if the uncertainty could lead to something that would be economically better for the UK,” said Lyn Graham Taylor, rates strategist at Rabobank in London.

However, the move was not a large one and unwinds the uptick in yields going into the vote.

Bund yields had risen marginally ahead of the vote on the back of some speculation that Labour MPs would switch sides which increased the probability of the withdrawal vote passing, Graham Taylor said.

Irish 10-year government bond yields also fell and were last down at 0.553 percent, having risen to 0.57 percent ahead of the vote.

German and French government bond yields remain on track for their biggest monthly falls since June 2016, ending a month where heightened anxiety about global growth prospects has caused a flood into fixed income globally.

Other 10-year bond yields across the single currency bloc, dipped briefly after the vote, though remained around one basis point higher on the day, reflecting a firmer tone in world stock markets on hopes that Washington and Beijing are making progress in trade talks..

Borrowing costs in Germany, the Netherlands and France remained close to 2-1/2 year lows hit this week as signs that the European Central Bank is considering ways to limit the impact of negative interest rates on banks triggered new bond buying.

“We have moved a lot in the last two weeks so there is a bit of pause for now,” said Pooja Kumra, European rates strategist, TD Securities.

German and French 10-year bond yields are down around 25 basis points each this month, set for their biggest monthly falls since June 2016 — when Britain voted in favour of leaving the European Union, rattling world markets.

Having dropped below zero percent for the first time since 2016 a week ago, Bund yields were also set to end the quarter down around 30 bps in their biggest quarterly fall in three years.

The sharp falls in the euro zone have been matched in equal measure by peers across the world - U.S. and Australian 10-year bond yields are down over 30 basis points each this month, reflecting concern about recession risks facing the world economy as well as uncertainty surrounding Brexit.

Reporting by Dhara Ranasinghe; Editing by Alison Williams and Angus MacSwan

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