By Dhara Ranasinghe
LONDON (Reuters) - Safe-haven euro zone bond yields headed back towards recent lows on Tuesday after Britain's attorney general said the legal risks of a Brexit deal with the EU had not changed, lowering the chances of the agreement getting through the parliament.
Geoffrey Cox's legal advice is crucial to winning over eurosceptic lawmakers in Prime Minister Theresa May's Conservative Party, and she had hoped revisions to a Brexit deal over the Irish backstop, or protocol, secured on Monday would offer enough assurances to get her deal through parliament.
The tweaks secured by May had sparked a rally in sterling and a selloff in major bond markets earlier in the day.
But as sterling tumbled 1 percent against major currencies in the immediate aftermath the Cox comments, investors fled back to the safety of top-rated government bond markets.
The selloff in the British currency cooled as the session wore on and it was down about half a percent by the close.
"If May goes ahead with the vote tonight given the Cox opinion, she will face a sizeable defeat, perhaps over 100 votes," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
Germany's benchmark 10-year government bond yield was steady at 0.06 percent, down from 0.107 percent earlier in the day and not far off more than two-year lows hit last week at 0.048 percent.
Across the euro area, higher-rated bond markets gave up earlier rises to stand little changed on the day..
Britain's 10-year gilt yield was also flat at 1.17 percent, having risen as much as 7 bps earlier in the session.
Brexit drives bond yields - https://tmsnrt.rs/2NWHV4D
"Gilt yields could go south from here," said Scicluna.
Together with world trade tensions, Brexit has exacerbated concern about the outlook for a world economy that has slowed in recent months.
Removal of some of the big risks would brighten the outlook significantly, analysts say.
"What markets need is to see some growth and inflation to start repricing bonds and that will be a slow process, so for now we are stuck in ranges," said Pooja Kumra, European rates strategist at TD Securities in London.
Elsewhere, Portugal's 10-year bond yield touched 1.308 percent, its lowest levels in at least 25 years, before settling at 1.33 percent by the end of the session.
ADVERTISEMENTThe ECB's decision last week to push back the timing of a rate rise to 2020 at the earliest and unveil a new round of cheap bank loans to support economic growth, in particular, have bolstered southern European bond markets.
Portugal's bond market has received additional support from expectations that its credit rating may be lifted on Friday by S&P Global.
(Reporting by Dhara Ranasinghe; Editing by Catherine Evans)
