By Dhara Ranasinghe and Yoruk Bahceli
LONDON (Reuters) - Euro zone bond yields rose on Monday after the European Union granted Britain a three-month extension to exit the bloc, weakening demand for safe-haven assets for now.
Just three days before the United Kingdom was due to leave the EU on Oct. 31 at 2300 GMT, British politicians were no closer to reaching a consensus on how, when or even if Brexit should take place.
Hopes that a no-deal Brexit would be avoided helped push bond yields in the euro zone higher over the past month, with 10-year yields in Germany close to their highest levels since late July.
European Council President Donald Tusk said on Monday that the 27 countries that will remain in the EU if Britain leaves agreed on Monday to accept London's request for a Brexit extension until Jan. 31, 2020.
"We have to say that the majority of the market is betting on a solution," said DZ Bank strategist Daniel Lenz. "The only question is when Brexit will happen. Nobody expects that the UK leaves without a deal."
Ten-year bond yields in higher-rated Germany, France and the Netherlands each rose around 2.5 basis points <DE10YT=RR> <FR10YT=RR> <NL10YT=RR>.
Germany's benchmark 10-year bond yield rose as high as -0.335% -- within sight of highs hit earlier this month at -0.333%. It is up 22 bps in October.
Elsewhere, Friday's ratings news drove markets in southern Europe.
Greece's 10-year bond yield touched a record low around 1.21% <GR10YT=RR> after S&P on Friday upgraded Greece's credit rating one notch to BB-, citing receding budgetary risks and lifting of capital controls. It gave the rating a positive outlook, meaning potential exists for a further upgrade.
Italian bonds underperformed, with the 10-year yield up 4 bps to 1.09% <IT10YT=RR>. S&P's review of Italy's credit rating on Friday kept the rating at BBB with a negative outlook.
"Greece is definitely benefiting from the rating action and in Italy, markets were expecting the negative outlook to be removed," said Pooja Kumra, European rates strategist at TD Securities in London.
Analysts said Italian bonds were also hurt by news of a victory for the far-right League in a regional election in Umbria, raising questions about how long the national government in Rome can survive.
Elsewhere, focus turned to the implementation on Wednesday of the European Central Bank's tiered rate policy and the resumption of asset purchases to boost growth.
Tiering is meant to shield banks from the ECB's penalty charge on excess reserves, by exempting banks from the ECB's deposit rate on excess cash up to six times mandatory reserves. But there's concern it will mean tighter monetary conditions, since it makes it more attractive for banks to park part of their excess liquidity at the ECB.
Commerzbank analysts expect an increase in Italian repo rates and fixings for the euro zone's new overnight rate, ESTR, once tiering is implemented.
(Reporting by Yoruk Bahceli and Dhara Ranasinghe; editing by Larry King)
