(Corrects yield on 10-year Irish bonds in 7th paragraph to 1.045 percent)
* Investors worry messy Brexit could hurt Irish economy, assets
* Ireland/Germany bond yield spread near widest since late May
* EU action over Italy budget due this week
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, Nov 19 (Reuters) - Irish government bond yield spreads over Germany were near their widest level since late May as worries over the economic impact of a messy Brexit hurt demand for the country’s debt.
British Prime Minister Theresa May last week disclosed a draft agreement on leaving the European Union that met with strong opposition from within her party, could spark a confidence vote in her leadership and increases the chances of a “no deal” Brexit.
Britain is one of Ireland’s biggest trading partners, and the border between Northern Ireland and the Republic of Ireland is a key issue in Brexit talks. The turmoil in the UK has caused Irish government bond yield spreads to widen.
“A no-deal Brexit could have an adverse impact on Ireland’s economic picture, which would impact risk assets and have some effect on government bonds as well,” said Commerzbank rates strategist Rainer Guntermann.
“It could affect the country in general, it could impact the budget position, the deficit position, and generally weigh on risk assets as well.”
While government bonds are generally not considered risky assets, euro zone government debt — especially lower-rated debt — often tends to perform differently, since individual countries don’t have control over printing money.
So while British Gilt yields dropped on the reaction to the contentious Brexit proposal, Irish yields increased, with 10-year yields hitting a one-month high of 1.045 percent on Friday.
On Monday, Irish yields were more or less unchanged and the spread between Irish and German 10-year bond yields was at 63 basis points, close to a 5 1/2-month high of 65.5 basis points hit on Friday.
German bonds have been the subject of flight-to-safety demand, thereby increasing a lot of spreads across the euro zone, but Ireland’s underperformance stands out.
For example, the Irish 10-year bond yield spread over its closest peer, Belgium, also reached its widest level since late May on Friday at 23.5 bps and was at 21 bps in early trade on Monday.
Better-rated yields were a touch higher on the day, with German 10-year yields, the benchmark for the region, 1.5 bps higher at 0.385 percent.
Italian government bond yields were unchanged going into a week in which the EU is expected to respond to Italy’s revised budget proposals.
Three officials close to the process told Reuters last week the European Commission will take the first step next week to discipline Italy over its defiant spending plans.
Reporting by Abhinav Ramnarayan, editing by Larry King