October 16, 2019 / 10:53 AM / a month ago

CORRECTED-UPDATE 1-Euro zone government bonds volatile on mixed Brexit deal hopes

(Corrects paras 8, 9 to reflect fact that Switzerland not part of euro area)

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Olga Cotaga

LONDON, Oct 16 (Reuters) - Euro zone government bonds were volatile on Wednesday as investors closely watched the talks between British and EU Brexit negotiators, with headlines suggesting the negotiations were at a standstill.

Irish Prime Minister Leo Varadkar said there were still issues to be resolved in Brexit negotiations.

But Michel Barnier, Brussels’ chief Brexit negotiator, said he was optimistic of getting a deal done on Wednesday.

The market “remains volatile with headlines, positive and negative ones,” said KBC rates strategist Mathias van der Jeugt.

“The one thing you can clearly say is that during (Boris) Johnson’s brief tenure as a prime minister, he’s never been closer to a Brexit deal than he is right now.”

German 10-year government bond yields were last flat at -0.42%. Yields spiked to an 11-week high of -0.397% earlier as Bund prices extended a sell-off that began on Tuesday after news reports that UK and EU negotiators were close to a draft deal, boosting risk appetite among investors.

Ten-year Bund yields could move up an additional 20 to 25 bps in the event of a Brexit deal, said van der Jeugt.

Other yields in the euro area were also stable, with a few outcasts falling, such as Italian 10-year bonds which dropped 4.1 bps to 0.99%.

Swiss 10-year bond yields fell 3.3 bps to -0.634% .

Early morning renewed risk appetite was not dented the U.S. House of Representatives’ adoption of four pieces of legislation taking a hard line on China, despite a warning from Beijing that bilateral relations would be damaged if the measures become law.

Three of the measures related to pro-democracy protests in Hong Kong and one commended Canada in its dispute over the extradition of a Chinese telecom executive. They come as the White House engages in delicate talks with China to resolve a crippling trade war which is nearly two years old.

“The Chinese trade war is out of focus because it is not so imminent,” said Christian Lenk, a rates strategist at DZ Bank. “In Europe we focus more on the Brexit issue because it is more imminent.”

European Union and British negotiators are closing in on a draft Brexit deal, which could be published on Wednesday.

Safe-haven German government bonds were sensitive to investors’ optimism over Brexit and prospects for a U.S.-China trade deal.

British government 10-year bond yields were down 2.7 bps at 0.67%, unchanged by stagnant inflation data in September, which came in at 1.7% year-on-year, slightly below market expectations.

Later in the day, traders will be watching the U.S. September retail sales, which have been relatively strong over the past few months. (Reporting by Olga Cotaga; Editing by Catherine Evans and Hugh Lawson)

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