November 15, 2018 / 9:32 AM / a month ago

UPDATE 3-Brexit turmoil boosts demand for safe-haven German bonds

* Brexit turmoil boosts demand for safe-haven debt

* British 10-year gilt yields slide 15 bps

* Bund yields down 5 bps, lowest in over 2 weeks

* Positive headlines in Italy support BTPs (Updates prices, adds comment)

By Dhara Ranasinghe and Abhinav Ramnarayan

LONDON, Nov 15 (Reuters) - Top-rated German government bond yields tumbled to over two-week lows on Thursday after British Brexit Secretary Dominic Raab resigned, thrusting Prime Minister Theresa May’s government into turmoil after she clinched a Brexit deal.

Sterling fell 1.6 percent against the dollar and 10-year British gilt yields dropped 15 basis points in their biggest one-day fall since August 2016, sending aftershocks across European markets.

Analysts said the move in gilts reflected both demand for safe-haven assets as well as a scaling back of Bank of England interest-rate hike expectations.

In the euro area, yields on higher-rated bonds fell 4 to 5 basis points, led by euro zone benchmark bond issuer Germany.

The 10-year yield on German bonds, regarded as some of the safest assets in the world, was down 5 basis points at 0.35 percent — its lowest in over two weeks.

“The reason we have a risk-off mood in the euro zone is driven by the UK,” said Rabobank rates strategist Lyn Graham-Taylor. “We’ve also seen wider bond spreads in the periphery, so this is clearly a spillover from Brexit.”

Borrowing costs in Spain, Italy and Portugal all faced upward pressure as investors stayed away from riskier assets after the developments in Britain injected fresh uncertainty into world markets.

European Union leaders will meet on Nov. 25 to endorse the divorce deal. May now faces the much more perilous struggle of getting parliament to approve the agreement.

“In short, it looks like political uncertainty is going to last for some time,” said Mizuho rates strategist Antoine Bouvet.

In Italy, positive developments helped shield Italian bonds from the risk-off sentiment sweeping markets.

Italian bond yields had opened lower after local reports said that Prime Minister Giuseppe Conte is seeking to work with the European Union on a budget impasse to avoid massive fines.

Analysts said that was a sign the head of Italy’s anti-establishment coalition government was looking for constructive dialogue with the EU after re-submitting a draft budget at Brussels’ request earlier this week with only minor tweaks.

“I think Conte is playing the good cop here, as he should, and that is feeding through into BTPs at the moment,” said ING strategist Martin Van Vliet.

“Any wider trigger for BTP spreads to widen are not really there. The pathway to eventual sanctions is very long and the chances are low that it will come to that,” he said.

There was some headline-related volatility in the bond market that pushed Italian yields up briefly, but by late trade yields were little changed.

Italy’s 10-year bond yield was steady at 3.50 percent .

Reporting by Dhara Ranasinghe and Abhinav Ramnarayan; Editing by Toby Chopra

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