LONDON (Reuters) - Investors sold safe-haven euro zone government bonds on Thursday as the British parliament’s rejection of a “no-deal Brexit” boosted risk sentiment, but confusion over the complex set of votes and uncertainty over the next steps limited the sell-off.
Most euro zone bond yields were slightly higher after British lawmakers on Wednesday rejected leaving the European Union without a deal, paving the way for a vote that could delay Brexit until at least the end of June.
Irish and Italian bond yields bucked the trend, falling.
Italian debt tends to rally when risk sentiment improves, unlike better-rated counterparts, while Irish bonds benefit from signs of a “soft” Brexit since Ireland is most likely to be affected by an unruly divorce between Britain and the EU.
“With not much on the data slate, the market is very much reacting to the Brexit news, and reacting positively as a delay looks more likely now,” said Commerzbank rates strategist Rainer Guntermann.
“But also most people are struggling to get the message (from Wednesday’s votes), visibility remains fairly low on the path going forward and uncertainty remains high,” he added, saying this will likely cap the rise in yields.
German 10-year bond yields, the benchmark for the bloc, rose 2.5 basis points to 0.09 percent; still not far from more than two-year lows of 0.048 percent hit earlier this month.
Other high-grade euro zone bond yields, such as France and the Netherlands, also rose 1-2 bps on the day.
This is not as dramatic as the reaction on sterling, for example, which had one of its strongest days this year so far on Wednesday as it became apparent which way the vote was going to go.
British gilt yields were sharply higher, with 10-year yields up as much as 5 basis points. Many investors believe that a favourable outcome on Brexit would allow the Bank of England to hike rates later this year.
“That vote is not legally binding in itself, but its political force is considerable ... We now see a 60 percent chance (up from 55 percent) that a close variant of the Prime Minister’s current Brexit deal is eventually ratified,” analysts at Goldman Sachs said in a note.
The potential impact of a “no-deal Brexit” had weighed heavily on markets, raising concerns about the potential impact on the economic and rates outlook in Britain and Europe.
Brexit-sensitive Ireland’s 10-year yield fell 3.5 bps to 0.69 percent, outperforming most euro zone peers.
Italian bond yields fell even more sharply by 7-8 bps across the board, and the closely-watched Italy-Germany 10-year bond yield spread tightened to around 240 bps — its tightest in a week.
Reporting by Abhinav Ramnarayan; Editing by Toby Chopra and Jon Boyle