UPDATE 2-Euro zone bond yields rise on hopes of Brexit delay

Top-rated euro zone bond yields rose on Tuesday as expectations rose of a delay to Britain's planned exit from the European Union and after a report that the ECB may have to broaden any future asset purchase programme to include equities.

British Prime Minister Theresa May will write to the European Union on Tuesday to ask for a Brexit extension until the end of June and with a possible two-year delay, the BBC's political editor said. Sterling climbed above $1.33 and took the shine off safe-haven bonds.

Trading was generally subdued ahead of a two-day meeting of the U.S. Federal Reserve that kicks off later in the day. Germany's 10-year government bond yield, the benchmark for the region, began to rise at around 1030 GMT, leading other core bond yields higher.

The 10-year Bund was last up three basis points to a 1-1/2 week high of 0.117 percent. It was set for its biggest one-day jump in almost three weeks. Analysts said the move could also be attributed to a report by MNI that the European Central Bank might have to buy stocks in any fresh round of quantitative easing.

The ECB ended its official asset purchases in December but, against a backdrop of weak economic growth, this month pushed back the timing of a rate hike and unveiled a new set of cheap bank loans to bolster the economy. "We think it is right for the ECB and the market to think what is the next easing measure, the next logical step is to restart asset purchases," said Antoine Bouvet, rates strategist at Mizuho.

"We think it makes sense for the ECB to consider other asset classes. At face value it makes economic sense, it lowers the cost of capital for the economy. It can be envisioned but we are still very far from it." Extending the programme to include equities would likely be negative for bonds but Bouvet said it was hard to attribute the move in bund yields solely to the report.

Traders said the MNI report contributed to a broad rally in European equities. "At the moment there are no discussions about resuming QE," said Giuseppe Sersale, strategist at Anthilia Capital in Milan.

"Certainly with such a market, any marginal positive newsflow has an impact. What's clear is that macro expectations are improving, see the ZEW...Scepticism has its days numbered." The mood among German investors improved by much more than expected in March, a survey by the ZEW research institute showed.

Investors turned their focus to Fed policymakers' interest rate forecasts and whether they would share details on a plan to stop culling the Fed's holdings of almost $3.8 trillion in bonds. (Reporting by Dhara Ranasinghe Editing by Alexander Smith/Mark Heinrich)