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Euro zone bond yields rise on hopes for Brexit deal approval

Tommy Wilkes

* Core euro zone yields up 1-2 bps

* Brexit optimism has fuelled recent selloff in bonds

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

LONDON, Oct 21 (Reuters) - Euro zone bond yields rose on Monday as investors sold safer assets on the receding risk of a British no-deal exit from the European Union and in the belief that the UK parliament could yet approve a Brexit agreement.

Optimism over Brexit negotiations - last week the European Union and Britain agreed a new deal - has fuelled a selloff in euro zone bond markets. Investors think that some sort of resolution to the Brexit uncertainty would boost the euro zone economy, as well as the British.

The deferral of a crunch vote on the withdrawal agreement in the British parliament at the weekend has done little to reverse that optimism, as the government was forced by parliament to write to the EU to ask for a delay to Britain leaving the bloc.

Natixis rates strategist Cyril Regnat said media reports that suggested Prime Minister Boris Johnson had the numbers to pass his deal was encouraging investors to buy riskier assets and hurting euro zone bonds in early trading.

However, he said the market should be more nervous than it was because the prospect of a no-deal Brexit remained as long as Brussels did not signal it would delay the Brexit departure date of Oct. 31.

"As long as the EU is not ready to send a clear sign of its willingness to extend, I don't see why we should have optimism around risky assets," he said.

The benchmark 10-year German government bond yield rose 3 basis points to -0.356%, while other core euro zone yields were also higher.

Regnat at Natixis said should a deal be approved by the British parliament, then the 10-year German bond yield could rise to -0.30%.

"Brexit has been one of the many factors weighing on (euro zone economic) confidence," he said.

British government bond yields also rose on Monday .

Peripheral bonds in Italy, Portugal and Spain were also

higher by 2 to 3 bps.

Analysts said Brexit would remain the dominant driver for euro zone bond markets until economic data released later in the week, including flash purchasing managers' index surveys.

"The data are expected to show very mild improvement, confirming that a bottom-building period is on its way. Given that the 10Y Bund yield has already risen by about 35bp from the lows it reached in early September, we do not expect the data to have much of an impact as long as they roughly meet the economists' expectations," UniCredit strategists said.

Investors are also preparing for European Central Bank President Mario Draghi's last policy meeting on Thursday. While no significant policy shifts are expected, markets will be watching closely for a sense of how deep is a rift among policymakers over renewed asset purchases.

(Editing by Alison Williams)