Euro zone bond yields fall after Brexit cliff-edge talk

• The implied uncertainty ahead may be providing some support for safe-haven government bonds.
• Most 10-year euro zone bond yields were about two basis points lower.

LONDON: Euro zone bond yields fell on Tuesday as the British government signalled a willingness to accept a Brexit cliff-edge to push Brussels to agree a trade deal and a final agreement on the first phase of a Sino-U.S. trade deal had yet to emerge.

British Prime Minister Boris Johnson, who was re-elected last week, said he would use his control of parliament to outlaw any extension to the transition period following the country's expected exit from the European Union on Jan. 31.

The implied uncertainty ahead may be providing some support for safe-haven government bonds, said DZ Bank rates strategist Andy Cossor, although he added that the end-2020 cut-off for a British trade deal with the EU was still a long way off.

Most 10-year euro zone bond yields were about two basis points lower, with Germany's 10-year yield at -0.29pc, far off a six-month high of -0.217pc.

Meanwhile, the so-called phase one trade deal between Washington and Beijing has been "absolutely completed", a top White House adviser said on Monday, adding that U.S. exports to China would double under the agreement.

Under the deal announced last week, Washington will reduce some tariffs on Chinese imports in exchange for Chinese purchases of agricultural, manufactured and energy products increasing by about $200 billion over the next two years.

U.S. trade representative Robert Lighthizer said a signing date was being determined while several Chinese officials told Reuters the wording of the agreement remained a delicate issue and care was needed to ensure expressions used in the text did not re-escalate tensions.

"Sometimes the devil is in the details so they may have framework agreement but nailing down the last few details can be trickier than market participants expect," said DZ Bank's Cossor.

A number of ECB policymakers made dovish statements on Tuesday. Estonia's central bank chief Madis Muller said some flexibility around the ECB's inflation objective could be acceptable and it could even be targetted within a band.

Finland's Olli Rehn said accommodative monetary policy will remain in place until inflation expectations return clearly close to 2pc and an impact is visible on core inflation, which excludes the food and energy sectors.

It's a light calendar for euro zone data releases ahead of Wednesday's influential German business sentiment Ifo survey, but U.S. industrial production data and housing starts numbers due later in the session will be watched closely.