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UPDATE 1-UK/Germany bond yield gap widest in 5 months after "no-deal Brexit" rejected

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By Abhinav Ramnarayan

LONDON, March 14 (Reuters) - British government bond yields rose sharply on Thursday and the gap between British and German bond yields stretched to its widest level in five months after the UK parliament rejected a "no-deal" Brexit.

British lawmakers late on Wednesday rejected leaving the European Union without a deal, further weakening Prime Minister Theresa May and paving the way for a vote that could delay Brexit until at least the end of June. Demand for safe-haven British Gilts weakened as result, and yields -- which move inversely to prices -- rose sharply on Thursday morning.

Tim Graf, head of macro strategy at State Street Global Advisors, said he advised being underweight Gilts because he believes there will be progress on Brexit and because of the relative resilience of the UK economy.

"If you get the base case (of some kind of Brexit deal) you will get some investment spending coming back. The BOE will respond to this with (rate) hikes maybe by November, and early next year they could think of another one," he said.

British 10-year Gilt yields rose 5 bps in early trade to 1.248 percent, pushing the spread over the German equivalent to 115 bps; the widest since October 2018. Two-year Gilt yields rose 4 bps to 0.79 percent. While comparisons between British and German yields are not strictly accurate reflections of risk, given the difference in currency and benchmark interest rates, they serve as a useful gauge of differing monetary policy outlooks.

Sterling was trading broadly flat against the dollar and the euro, having leapt 1.5 percent on Wednesday to nine-month highs of $1.3380. In addition, the UK's debt management office is due to sell 30-year bonds in an auction later on Thursday. RBC analysts said in a note that the timing of the auction was challenging, but structural demand for long-dated British government debt bodes well for the sale.
(Reporting by Abhinav Ramnarayan; editing by Virginia Furness)

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