Euro zone yields slip as Brexit deal jitters stall selloff

Euro zone bond yields edged lower on Thursday after progress towards a Brexit agreement ran into problems, stalling this week's government bond market selloff. Northern Ireland's Democratic Unionist Party said it could not support the proposed Brexit deal as it stands, as London and Brussels raced to strike a deal before a European Union summit begins.

Investors have been dumping eurozone bonds in recent days as hopes have grown that Britain and the EU can finally reach an agreement on Britain's departure, avoiding more uncertainty that could damage both economies. German 10-year government bond yields, which reached an 11-week high on Tuesday, fell 1 basis point to -0.396 %, below the high of -0.377% touched on Tuesday.

Other core eurozone yields were also lower, including the French and Dutch. "Brexit's the only show in town today"," said Lyn Graham-Taylor, fixed income strategist at Rabobank.

He said he expected Britain to seek an extension to the Oct. 31 departure date. But investors were looking for a reason to sell, he said and would be studying the tone in which any Brexit delay was sought. "An extension with a positive tone would see a positive selloff," he said.

Reduced tensions between China and the United States over trade and some confidence that the eurozone economy is recovering have also encouraged many to sell bonds for riskier assets. Weaker-than-expected U.S. retail sales data on Tuesday did little to reverse the selloff. That is in contrast to the summer when jittery investors piled into eurozone debt on any sign of economic weakness and in anticipation of another round of European Central Bank monetary easing.

"With Brexit remaining as the driving force for near-term rates moves, it's increasingly difficult to take a directional view in light of this uncertainty, even though the global backdrop remains relatively negative," Mizuho analysts said in a note. British government bond yields fell across the board, with the 10-year bond dropping 4 bps to 0.677.

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