Germany's 10-year govt bond rose 3 basis points over Brexit optimism

Eurozone bond yields were lifted off recent lows on Wednesday with Germany's benchmark Bund heading back towards zero percent as hopes of a softer Brexit fuelled risk appetite and investors took heart from signs of progress in U.S.-China trade talks. British Prime Minister Theresa May said on Tuesday she was seeking another short extension to Brexit beyond April 12 and offered to work with opposition Labour Party leader Jeremy Corbyn to agree with a divorce deal. Analysts say this suggests May is pivoting towards a softer Brexit.

"May has finally arrived at the point she should have begun the process at, by asking the entire house what sort of Brexit should be delivered," said Matt Cairns, rates strategist at Rabobank. "This is adding to the positive tone in the market." Germany's 10-year government bond yield rose 3 basis points in early trade, heading back towards zero per cent for the first time since March 25 after expectations of further monetary easing from the European Central Bank pushed it into negative territory. It was last seen at -0.02 per cent.

Analysts expect it to test zero per cent during the session. Markets were also lifted overnight by hopes of progress in China-U.S. trade talks, and stronger data earlier this week. Asian shares rose to seven-month highs, while oil approached the key $70 per barrel mark.

The United States and China "expect to make more headway" in trade talks this week, White House economic adviser Larry Kudlow said on Tuesday, while the Financial Times reported that Chinese and U.S. officials have resolved "most of the issues" standing in the way of a trade deal. U.S. Treasury yields were 4 basis points higher in European trade to 2.52 per cent has risen over 10 basis points this week.

The turn in sentiment boosted euro zone government bond yields above from the 2-1/2 year lows seen last week after ECB President Mario Draghi said the central bank was considering ways to alleviate pressure on banks. Most 10-year yields in the bloc were up to 4 basis points higher. Analysts at Societe Generale expected the euro zone composite PMI for March to be revised upwards after a material drop in the flash estimate, which may also put some upward pressure on bond yields.

(With inputs from agencies.)