Euro zone government bond yields fall before Brexit vote

• Eyes on dual vote on Brexit in UK parliament
• Euro zone bond yields fall; Italy outperforms
• European Commission asks for clarity on Italian budget

LONDON: Euro zone government bonds yields fell on Tuesday, before a vote in British parliament crucial to determining whether the UK can leave the European Union in an orderly way at the end of the month.

UK Prime Minister Boris Johnson faces two Brexit votes in the British parliament on Tuesday. Lawmakers will first vote on a Withdrawal Agreement Bill and then on the government's timetable for approving the legislation.

"It's too close to call whether there will be a majority," said DZ Bank rates strategist Daniel Lenz. "This may be also very much reflected by market developments, that you don't see major movement to one or the other side."

Johnson probably has the votes to pass the withdrawal bill but may struggle to pass his timetable on Tuesday, the BBC's political editor said.

Ten-year government bond yields across the euro zone were down 2 basis point on the day . Germany's 10-year yield was at -0.36%.

Analysts say much of the optimism around Brexit is already priced in and expect subdued reactions. Euro zone government bonds sold off as the first signs of a Brexit deal emerged; the German 10-year bond yield has risen 19 bps since Oct. 10.

"The market is pricing a lot of optimism, a) on the no-deal Brexit being taken off the table tonight, b) on the deal being approved tonight. Therefore, there's not much room for rates to move higher," said ING senior rates strategist Antoine Bouvet.

Meanwhile, Italian government bonds outperformed, the 10-year yield falling 6 basis points to 1.03%.

"Think of BTPs at the moment as being bunds with greater volatility. So when the bund market sells off, BTPs tend to sell off more," ING's Bouvet said.

The European Commission has sent a letter to Italian authorities, asking for clarification over their 2020 draft budgets. Rome will reply by Wednesday.

A major conflict is not expected, unlike last year when the Commission sent back Italy's draft budget and asked for a new one, sparking a surge in Italian yields.

Italy's draft 2020 budget assumes a rise in its structural deficit of 0.1% of GDP. Under EU rules, it should fall to 0.6% of GDP.

Meanwhile, Italy's debt rose to 138.0% of gross domestic product in the second quarter of the year, up from 136.6% in the previous three months, in further violation of EU requirements.

Analysts said a successful sale of BTP Italia inflation-linked bonds to retail investors also supported Italian bonds. The sale has fared better than a similar bond last November, when demand was weakened by a row with the EU over Italy's public finances.