November 1, 2017 / 8:52 AM / a year ago

Differing central bank prospects push U.S. and German yields apart

* U.S.-Germany bond yield spread widens to 202 bps

* FOMC meeting expected to point to Dec rate hike

* ECB expected to hike rates well after Sep 2018

* Euro zone periphery govt bond yields

By Abhinav Ramnarayan

LONDON, Nov 1 (Reuters) - The gap between German and United States 10-year bond yields was close to its widest level since April on Wednesday ahead of a U.S. central bank meeting at which ratesetters are expected to bolster expectations for a December rate hike.

The Federal Reserve is expected to keep interest rates unchanged on Wednesday as speculation swirls on who will be its next leader, but it will likely point to a firming economy as it edges closer to a possible rate rise next month.

This is in contrast to monetary policy prospects in Europe, where the European Central Bank last week said it would only hike rates well after its bond-buying scheme ends, scheduled to run until September 2018 at the very least.

This has sparked a strong rally in European government bonds in recent days, particularly Southern European debt seen as the biggest beneficiaries of ECB largesse.

“This European government bond-US Treasury divergence is set to continue as long as the outlook for monetary policy continues to diverge between the two currency zones,” analysts at Mizuho said in a note.

Money market pricing suggests President Mario Draghi will go his whole eight year tenure at the helm of the European Central Bank without ever having raised interest rates.

The gap between U.S. 10-year yields and Germany — the benchmark for the euro zone — widened to 202 basis points, closer to a six-month high of 204 bps hit last week.

U.S. Treasury yields have fallen sharply this week on speculation on the next Federal Reserve chair and on concerns over an investigation into alleged Russian efforts to affect the 2016 presidential election.

However, they came off their trough on Wednesday, rising a basis point to 2.39 percent. Though this did widen the gap to European equivalents, it also pulled German yields higher along the way.

The yield on Germany’s 10-year Bund edged higher to 0.37 percent. Most other high-grade euro zone bond yields were also a touch higher.

The rally in Italian, Spanish and Portuguese government debt showed no sign of abating - yields across all three Southern European government bonds dipped further to their lowest level in months.

“I expect benchmark yields to move higher in the coming days as data keeps the Fed on track for a December hike,” said ING strategist Martin van Vliet.

“Though most people think the ECB meeting is the driver in Europe, U.S. Treasuries is having spillover effects on the Bund market,” he said.

A slew of U.S. data is due out Wednesday, including the first employment indicator of the week in the shape of the ADP employment data, followed by ISM’s manufacturing numbers.

In addition to prospects for a December rate hike and the announcement of the new Fed chair, investors are also keeping an eye out for Thursday’s expected release of tax legislation by Republicans in the U.S. House of Representatives, said van Vliet.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Abhinav Ramnarayan; editing by Peter Graff

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