September 24, 2019 / 8:49 AM / 6 months ago

UPDATE 2-Euro zone bond yields up briefly after UK Supreme Court ruling

* UK Supreme Court rules against PM Johnson

* Ifo business climate index rises in September

* But expectations deteriorate

* Euro zone periphery govt bond yields (Updates with reaction to UK Supreme Court ruling)

By Dhara Ranasinghe

LONDON, Sept 24 (Reuters) - Euro zone bond yields inched up on Tuesday after the UK Supreme Court ruled that Prime Minister Boris Johnson's suspension of parliament was unlawful, briefly denting demand for safe-haven government bonds.

The ruling paves the way for UK legislators to return to parliament, where Johnson has no majority. It could give lawmakers - most of whom are opposed to Britain leaving the EU without a divorce agreement as Johnson has threatened - further opportunity to impede his strategy.

"This is a win for the pro-remain side and suggests it will be harder for the government to push a no-deal Brexit before the end of October," said Chris Graham, senior economist at Standard Chartered in London.

Germany's 10-year Bund yield briefly rose to a session high of -0.559%, but pulled back to -0.58%, trading flat on the day.

Across the single-currency bloc, most 10-year bond yields were up around 1 bps.

Gilt yields also steadied after a brief rise.

"The intraday spike reflects the surprise of the decision, you see it in bond markets and sterling. Ultimately, it's [the decision] not going to have a lasting effect; we move on to the next chapter in the story," said Peter Dixon, chief UK economist at Commerzbank.

A gloomy outlook for the euro zone economy continued to underpin bond markets.

German business sentiment improved in September as companies took a better view of current conditions, but their expectations for the outlook deteriorated as Europe's largest economy teetered on the brink of recession, the Ifo sentiment survey showed on Tuesday.

The data followed dismal purchasing managers' indexes on Monday. German private-sector activity shrank in September for the first time in more than six years. Growth in services slowed.

In the wake of Monday's PMI numbers, German Bund yields fell 6 basis points in the biggest one-day decline since June 18, when a dovish speech by ECB President Mario Draghi sent bond yields sharply lower.

"The outlook index is still pretty dire and while current conditions on the Ifo index showed an improvement, it is still pretty weak," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

Elsewhere, French central bank chief Francois Villeroy de Galhau said that the European Central Bank's new bond purchase scheme was unnecessary, joining a growing list of public critics since the bank announced the scheme two weeks ago.

Reporting by Dhara Ranasinghe, additional reporting by Yoruk Bahceli and Sujata Rao; editing by Larry King and Susan Fenton

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