German bond yields rise on increased Brexit optimism

Yields on higher-rated euro zone government bonds rose on Tuesday as hopes that British Prime Minister Theresa May may be close to securing approval for her Brexit deal dented demand for safe-haven assets.

May won legally binding Brexit assurances from the European Union late on Monday in a last-ditch attempt to sway rebellious British lawmakers who have threatened to vote down her divorce deal again. While it was not clear if this would be enough to secure parliamentary support later on Tuesday for the deal, the progress boosted investor sentiment -- lifting the British pound and equity markets.

Germany's benchmark 10-year government bond yield rose 2.5 basis points to 0.09 per cent -- moving away from more than two-year lows hit last week in the wake of a dovish European Central Bank meeting. Across the euro area, higher-rated bond markets were on the back foot, with yields up 1-2 bps on the day.

"The (UK) news has added to some of the positive sentiment of getting Brexit through parliament," said Pooja Kumra, European rates strategist at TD Securities in London. "What markets need is to see some growth and inflation to start repricing bonds and that will be a slow process, so, for now, we are stuck in ranges," she added.

Brexit, together with world trade tensions, have exacerbated concern about the outlook for a world economy that has slowed in recent months. Removal of some of the big risks would brighten the outlook significantly, analysts say.

Indeed, at current levels, German bond yields are down 19 bps from January peaks and 50 bps below levels traded in early October. The rally in risk appetite lifted demand for the euro zone's lower-rated bond markets, with Italian yields lower across the board.

Portugal's 10-year bond yield was pinned close to its lowest levels in at least 25 years, trading at around 1.31 per cent. The ECB's decision last week to push back the timing of a rate rise to 2020 at the earliest and unveil a new round of cheap bank loans to support economic growth, in particular, have bolstered southern European bond markets.

Portugal's bond market has received additional support from expectations that its credit rating may be lifted on Friday by S&P Global.

(With inputs from agencies.)