* Fed rate hike expectations grow as ECB stays on loose path
* "Transatlantic" spread at 211 bps as euro zone yields fall
* France and Spain to sell up to 12bn euros of bonds
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
LONDON, Feb 16 The spread between U.S. and
German benchmark government bond yields were close to one-month
highs on Thursday as the central banks of the two regions
diverge on policy and political risks in Europe keep a lid on
Expectations for a Fed rate hike potentially as early as
next month have grown after hawkish comments from policymakers
and data on Wednesday showing U.S. inflation recording its
biggest gain in nearly four years.
These expectations have been pushing U.S. Treasury yields
higher. Though German benchmark government bond yields, which
normally move in sympathy with U.S. equivalents, also rose, the
gap between the two is at 211 basis points, just 2 bps off
one-month highs hit on Wednesday.
"The consolidation in the transatlantic spread has ended
with the hawkish talks from the U.S.," said DZ Bank strategist
Daniel Lenz. "Meanwhile tapering talk in Europe has faded with
the ECB stating that it is not on the agenda and political risks
keeping it from rising too much."
This has meant that while the yield on Germany's 10-year
government bond, the benchmark for the region, has
risen steadily since hitting its September trough of minus 0.16
percent, trading has been choppy.
On Thursday, for example, it fell 1 bp to 0.375 percent,
coming off one-week highs hit on Wednesday. Most other euro zone
bond yields were also down 1-2 basis points.
"We have shifted to a new range on Bund yields, but there is
still a lot of uncertainty and (European) markets are trying to
figure out what to filter through from the Fed," said ING
strategist Benjamin Schroeder.
The U.S.-German bond yield spread has been noticeably wider
since the election of Republican Donald Trump as U.S. President
fuelled expectations of higher growth and inflation in the
world's richest country.
"Political issues are driving a wedge between U.S.
Treasuries and 10-year Bund yields," said Schroeder.
Upcoming elections in the Netherlands, France, Germany and
possibly Italy, have kept investors interested in "safe"
government bonds particularly with anti-euro and anti-EU
sentiment on the increase throughout the continent.
Markets will get a better idea of the degree of divergence
between the two central banks later on Thursday when the
European Central Bank publishes the minutes of its January
Consumer prices in the single currency bloc rose 1.8 percent
in January, close to the ECB's target of just below 2 percent,
ramping up the pressure on the central bank to reverse its
ultra-loose policy stance.
But ECB President Mario Draghi has been at pains to stress
that the data may be a one-off, fuelled by an increase in
commodity prices, and that the euro zone still needs monetary
"The ECB minutes should provide more minutes on the extent
of any hawkish dissent," Mizuho analysts said in a note.
Spain and France are due to sell bonds via auctions later on
Thursday, with total supply from the pair potentially as high as
12 billion euros, according to Mizuho.
(Reporting by Abhinav Ramnarayan; Editing by Toby Chopra)