UPDATE 3-Euro zone bond yields rise on hopes of Brexit delay

Top-rated euro zone bond yields rose on Tuesday as expectations grew 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 ask the EU to delay Brexit by at least three months after her plans for another vote on her twice-defeated divorce deal were thrown into crisis when the speaker of parliament said she could not put the same deal forward for more votes.

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 after hitting a 1-1/2 week high of 0.124 percent earlier in the session. 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." Peripheral bond yields also rose with Italian 10-year government bonds up more than six basis points to 2.488 percent, while Portugal's 10-year yield was four basis points higher at 1.30 percent, its largest one day rise since Jan. 24. 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.