October 16, 2019 / 7:40 AM / 2 months ago

Euro zone government bonds extend falls as Brexit deal hopes remain strong

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

By Olga Cotaga

LONDON, Oct 16 (Reuters) - Euro zone government bonds fell on Wednesday, extending a sell-off that began on Tuesday after news reports that UK and EU negotiators were close to a draft deal on Brexit, which boosted risk appetite among investors.

That renewed hunger was not dented by the U.S. House of Representatives’ adoption of four pieces of legislation taking a hard line on China, despite a warning from Beijing that bilateral relations would be damaged if the measures become law.

Three of the measures related to pro-democracy protests in Hong Kong and one commended Canada in its dispute over the extradition of a Chinese telecom executive. They come as the White House engages in delicate talks with China to resolve a crippling trade war which is nearly two years old.

“The Chinese trade war is out of focus because it is not so imminent,” said Christian Lenk, a rates strategist at DZ Bank.

“In Europe we focus more on the Brexit issue because it is more imminent.”

European Union and British negotiators are closing in on a draft Brexit deal, which could be published on Wednesday, according to news reports from Bloomberg and the Guardian.

German 10-year government bond yields rose 1.4 basis points to -0.407% after earlier hitting a fresh 11-week high of -0.397%.

Safe-haven German government bonds are extending losses after a heavy sell-off last week, when the 10-year yield went up 15 bps on optimism over Brexit and prospects for a U.S.-China trade deal, which eased uncertainty about the global economic outlook. The fall in Bunds pushed yields in other euro zone economies up by around 1 bps.

Traders will be watching September inflation data releases in Britain, due at 0830 GMT, and a confirmatory figure for the euro area, due at 0900 GMT.

U.S. September retail sales, which have been relatively strong over the past few months, are due later in the day.

However, “in line of these political decisions that are coming, economic data will be in the second role the markets are focusing on,” said Lenk. (Reporting by Olga Cotaga; Editing by Catherine Evans)

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