LONDON: Euro zone government bond yields edged higher on Tuesday after US lawmakers averted a government shutdown, but a crowded calendar of political events in Europe capped the rise.
President Donald Trump and US congressional leaders reached agreement on Monday on a two-year extension of the debt limit and federal spending caps that would avert a feared government default.
That pushed euro zone government bond yields higher in early European trade. But with the governments in the UK, Spain and Italy all in various stages of flux, the move was limited, and yields were still near recent record lows.
Germany's 10-year bond yield, the benchmark for the euro zone, was slightly higher on the day, but at minus 0.345% was near Monday's two-week low and not far from the record low posted at the start of the month. Other euro zone bond yields were 1 to 2 basis points higher.
In the United Kingdom, Brexiteer Boris Johnson, who has promised to lead Britain out of the European Union with or without a deal by Halloween, won a leadership contest that will see him replace Theresa May as prime minister.
Short-dated British Gilt yields remained at a near-three-week low at 0.49% and not far from a one-and-a-half-year low hit at the start of the month as investors bet that a no-deal Brexit outcome would scupper any chances the Bank of England would raise interest rates.
Other upcoming events include a rumoured meeting between the leaders of the two squabbling parties who make up Italy's coalition government, 5-Star Movement's Luigi Di Maio and League's Matteo Salvini.
"Investors are waiting to see whether this government will survive," said DZ Bank strategist Daniel Lenz. "One possibility is that the coalition continues but both agree to replace (Giuseppe) Conte as prime minister, which would be a very bad signal."
Many investors would view the collapse of the government as a positive, especially if it were replaced by the League which is seen as more pro-business.
As a result, Italian government bond yields were 4 to 5 basis points lower on the day, reversing a sharp rise on Monday.
In Spain, Socialist Pedro Sanchez will seek to become Spain's Prime Minister in a confirmation vote, though far-left Podemos has demanded a bigger role in government in return for its backing.
Spanish government bonds were slightly higher on the day, with 10-year yields at around 0.41%.
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