Wires

Euro zone bond yields inch up, Brexit in focus

Dhara Ranasinghe

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

LONDON, Oct 15 (Reuters) - Euro zone bond yields inched up on Tuesday, pushed higher by upbeat comments from the European Union's chief negotiator in Brexit talks.

Reaching an agreement on the terms of Britain's departure from the EU is still possible this week, even if it is more and more difficult, the EU negotiator, Michel Barnier, said.

The United Kingdom will make new Brexit proposals on Tuesday in an attempt to break the Brexit deadlock, RTE reported.

Sterling rose on Barnier's comments. Bond yields across the euro area recovered from early declines.

Germany's benchmark 10-year bond yield was 0.5 basis points higher on the day at -0.45%, just below two-and-a-half month highs reached at the end of last week around -0.43%.

Irish bonds, which benefited last week from signs of progress in talk between Irish and British leaders, were steady.

Ireland's 10-year bond yield was around 0.03%. 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 have sold off as optimism over Brexit eases uncertainty about the economic outlook.

Germany is scheduled to sell around four billion euros of two-year bonds later this session. Analysts said that the recent sell-off in bonds boded well for the auction, with investors expected to move back into the cheapened bond market.

"The recovery in fixed-income sentiment early this week, as well as the smaller size, should make for a decent auction today," analysts at Mizuho said in a note.

Analysts said they would also be watching the German ZEW sentiment index for latest clues on the outlook for the euro zone's biggest economy. (Reporting by Dhara Ranasinghe, editing by Larry King)