UPDATE 2-Italian bonds shine on solid debt sale, gilt selloff hurts broader EZ markets

Italy's bond yields tumbled on Wednesday after record demand for a new 15-year bond a day earlier, while a selloff in UK gilts after a hefty parliamentary defeat for Prime Minister Theresa May's Brexit plans hurt broader euro zone debt markets.

Lawmakers rejected May's Brexit divorce deal late on Tuesday by a crushing margin, pushing Britain's gilt yields up seven basis points to 1.32 percent.

The sharp rise in gilt yields, which analysts said may reflect expectations for a softer Brexit, weighed on the euro zone's higher-rated bond markets.

In Italy, a rally in bonds gained momentum as trading wore on with yields falling as much as 13 basis points. Its five year bond yields touched an almost six-month low of 1.64 percent, while 10-year yields were last down over 10 basis points on the day to 2.76 percent.

This pushed the spread of Italy's 10-year debt over top rated Germany to 254 basis points, its tightest level for two-weeks.

Italy raised 10 billion euros ($11.4 billion) in its biggest ever syndicated bond sale on Tuesday, drawing total investor orders of more than 35.5 billion euros, according to a lead manager at one of the banks that helped sell the debt.

Demand for the new bond was buoyed by the resolution last month of a protracted row between Rome and the European Commission over Italy's budget.

"The Italian syndication went very well and the good performance of Italian bonds gives a lot of confidence for investors to come back to the market," said Ciaran O'Hagan, rates strategist at Société Générale. "Brexit is a sideshow."

Italy's solid debt deal, its first bond sale via a syndicate of banks in a year, also lifted sentiment towards southern European bond markets.

Spain's 10-year bond yield was last down 1.5 basis points to 1.38 percent, pushing the gap over benchmark German bond yields to a low of 112.90 bps - its tightest in almost three weeks.

Elsewhere Greek five and 10-year bonds were flat to 2.4 basis points higher with Prime Minister Alexis Tsipras expected to survive a no confidence vote on Wednesday night.

SPOTLIGHT ON GILTS

For broader euro zone markets, the Brexit vote weighed as the potential for a softer Brexit would reduce demand for safe-haven euro zone bonds.

German 10-year bond yields for instance rose 3 bps on the day to 0.24 percent before easing off to 0.22 percent .

"Clearly there was a lot of pessimism in the market ahead of the Brexit deal vote, so after the vote I did expect gilt yields to move higher," said Pooja Kumra, European rates strategist at TD Securities in London.

"But there is still a lot of uncertainty and this move in gilts is likely to be short-lived."

Theresa May's government faces a no confidence vote in parliament later on Wednesday.

Still, Goldman Sachs strategists said in a note that Tuesday's defeat signals the prospect of a disorderly "no deal" Brexit has receded with a greater probability of an extension to the end-March deadline.

Analysts said euro zone bond markets also drew some support from dovish comments on Tuesday by European Central Bank chief Mario Draghi.

The euro zone's economy is not heading for a recession but still needs support from the ECB as its slowdown could last longer than expected, Draghi said. ($1 = 0.8773 euros)

(Reporting by Dhara Ranasinghe; Additional reporting by Virginia Furness; Editing by John Stonestreet and Susan Fenton)

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