UPDATE 1-Euro zone bond yields slip as investors watch Brexit headlines

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds latest Brexit developments, ZEW survey, analyst comments, German auction)

By Yoruk Bahceli and Dhara Ranasinghe

LONDON, Oct 15 (Reuters) – Euro zone bond yields slipped on Tuesday as investors focused on Brexit headlines and German investor sentiment worsened less than expected.

All focus this week is on the prospects of a Brexit deal being agreed that will help the United Kingdom depart from the European Union in an orderly fashion, ahead of a European Council summit where it could be put to the approval of EU leaders.

The European Union’s Brexit negotiator Michel Barnier said the latest UK proposals were not yet good enough, three diplomatic sources told Reuters, while Finland’s EU minister said leaders would discuss another delay to Britain’s exit from the Union.

The United Kingdom is making new Brexit proposals on Tuesday, RTE reported.

Comments from the EU’s chief Brexit negotiator that a deal was still possible this week had fuelled a brief selloff in euro zone debt earlier on Tuesday, alongside a rally in the pound, but the market retraced those moves as later headlines pointed to uncertainty.

Jean-Christophe Machado, fixed income strategist at Natixis, said he expected subdued moves on government bonds until more clarity emerges on Brexit, anticipating aggressive moves on sterling in the FX market to continue instead.

Meanwhile, the mood among German investors worsened only slightly in October, a survey showed on Tuesday, beating an analyst consensus for a bigger drop amid concerns that Europe’s biggest economy could be headed towards a recession.

Germany’s benchmark 10-year bond yield fell 1 basis point to -0.47%, just below two-and-a-half month highs.

“I don’t really look at those indicators because global mood is so bad that when you are asked in the survey, you have to take into account Brexit and the trade war,” said Natixis’s Machado.

He said he was instead keen on seeing the sentiment index and PMIs following a Brexit deal, adding that even a no-deal Brexit could potentially lead to an improvement.

“Some people might say it’s behind us now and we know what’s happening,” Machado said.

Irish bonds continued to benefit from hopes for a deal, with the 10-year yield down 2 basis points at 0.02%. The gap over safer German Bund yields was around 47 bps and close to its narrowest since July.

“We are watching the Irish spread. It hit a low in July and then the worries about a no-deal Brexit meant the spread widened,” said Daniel Lenz, a rates strategist at DZ Bank.

“But in recent days in particular we have seen a tightening in the spread and that shows investors are less concerned about Brexit.”

While Irish bonds have rallied on hopes for a Brexit deal, safe-havens such as German and U.S. bonds sold off last week on optimism over Brexit, which eased uncertainty about the economic outlook.

In the primary market, Germany sold 3.2 billion euros of two-year government bonds in an auction, receiving higher demand than a similar sale in September.

Analysts say the recent sell-off in bonds boded well for the auction, with investors expected to move back into a bond market where prices have lowered.

Reporting by Dhara Ranasinghe and Yoruk Bahceli; additional
reporting by Elizabeth Howcroft; editing by Larry King and Ed

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