October 18, 2019 / 8:03 AM / 25 days ago

Euro zone bond yields inch up before UK's Brexit vote

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

By Yoruk Bahceli

LONDON, Oct 18 (Reuters) - Euro zone bond yields inched up on Friday as the British parliament prepared to vote on Saturday for or against an agreement on the United Kingdom’s departure from the European Union.

EU leaders unanimously backed the new Brexit deal on Thursday, leaving UK Prime Minister Boris Johnson facing a battle to secure parliament’s backing if he still hopes to take Britain out of the EU on Oct. 31.

“Today will be all about estimating how likely it is that the British parliament will agree to the Brexit deal tomorrow,” UniCredit analysts said in a client note.

European Commission President Jean-Claude Juncker opposed extending the Brexit deadline past Oct. 31, but European Council President Donald Tusk refused to rule out an extension. The EU member states would need to agree.

“It looks like there won’t be a no-deal. It looks like the European leaders look open to an extension, despite what Juncker said,” said Rabobank fixed income strategist Lyn Graham-Taylor.

Ten-year benchmark bond yields were about 1 basis point higher in early. Germany bund yields held at -0.40%, the highest since early August.

The yield is up 16 bps since Irish and British leaders said on Oct. 10 they saw a path to a Brexit deal, which boosted risk appetite and weakened demand for safe-haven assets like bonds.

UniCredit analysts said in a client note they expect 10-year yields to plunge about 10 bps if parliament rejects the deal, which would boost demand for safe-haven bonds.

Yields would rise less than 10 bps with a deal, they said, “given the continued weak outlook for global growth and the accommodative stances of the Fed and particularly the ECB”.

Rabobank’s Graham-Taylor said his base case was that the deal won’t pass in parliament, leading to a bond market rally, which would fade is an extension is agreed.

China’s economic growth slowed more than expected in the third quarter, to 6.0% year-on-year, the slowest pace in more than 27 years. However, industrial output rose more than expected in September and retail sales rose in line with expectations.

“The Chinese data was a bit of a mixed bag ... I wouldn’t describe it as shocking data,” Rabobank’s Graham-Taylor said.

The downbeat data raise the prospect that Chinese policymakers could prepare more measures to boost growth. But analysts and market players said Beijing has little room to ease.

Reporting by Yoruk Bahceli, editing by Larry King

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