Wires

UPDATE 2-No-deal Brexit worries push Irish bond spreads to widest in over a month

Abhinav Ramnarayan

month@

* Ireland/Germany 10-year spread hits widest since June 5

* Sterling hits 28-mnth low on no-deal Brexit worries

* German inflation expected to undershoot ECB target (Adds quote, graphic, updates prices)

LONDON, July 30 (Reuters) - Irish government bond yield spreads over Germany hit their widest levels in more than a month on Tuesday, as worries grow over the potential impact of a no-deal Brexit on Europe in general and Ireland in particular.

Sterling has dropped to 28-month lows against the dollar and euro on worries that Britain may leave the European Union without a deal on Oct. 31 under new Prime Minister Boris Johnson.

In the euro zone bond market, Ireland has been hardest hit; Britain is Ireland's biggest trading partner, and the border between Northern Ireland and the Republic of Ireland is a key issue in negotiations.

"In light of the new cabinet's comments, we have replaced the Irish government bonds held within our sovereign benchmarked funds, replacing this risk with Spain as Irish bonds continue to price in very little hard Brexit risks," said UBP's Mohammed Kazmi, who is portfolio manager of the UBAM Absolute Return Low Vol Fixed Income Fund.

That said, the Ireland/Germany 10-year bond yield spread did widen out to 59 basis points at one point on Tuesday, the widest in nearly two months.

"The upward shift (in Irish spreads) is due to the change in tone in Westminster and that the tail risk of a no-deal Brexit is being priced in," said DZ Bank rates strategist Daniel Lenz.

"We know that trade links between Ireland and the UK are very strong, and trade would be very much affected and there would also be political concerns related to the border. It is still only a tail risk but the tail is growing," he added.

The widening in Irish spreads contrasts with similarly-rated France and Belgium, both of which have seen their spreads to Germany tighten in recent weeks.

Other euro zone government bond yields were mostly unchanged, but held near recent lows.

Germany's 10-year government bond yields were hovering near the minus 0.40% deposit rate mark on Tuesday morning ahead of a Federal Reserve meeting in which U.S. policymakers are expected to cut rates and potentially signal more cuts along the way.

Deepening concerns over a no-deal Brexit and disappointing French economic growth data also kept alive the bid for safe haven assets.

With German inflation data due later on Tuesday expected to fall below the European Central Bank target for the bloc as a whole, most euro zone bond yields are being held near recent lows.

French 10-year bond yields remained deeply in negative yielding territory at minus 0.138%.

(Reporting by Abhinav Ramnarayan, Additional reporting by Andy Bruce; editing by Sujata Rao, William Maclean and Andrew Heavens)