August 22, 2018 / 8:21 AM / 3 months ago

German-U.S. bond yield gap tightens on signs of reviving euro zone economy

* “Transatlantic spread” at 250bps, near tightest in two months

* German yields remain off recent lows at 0.33 pct

* Markets watch for Fed minutes due later

* Trump worries push U.S. Treasury yields lower overnight

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, Aug 22 (Reuters) - The gap between German and U.S. 10-year borrowing costs was close to its tightest level in two months on Wednesday, as the euro zone economy and inflation showed signs of improvement.

The transatlantic spread hit its widest level in years earlier this year as the U.S. economy powered on and the Federal Reserve went ahead with multiple rate hikes at a time when the European Central Bank was only planning to remove extraordinary stimulus extremely gradually.

But signs of improved economic growth and inflation in the single currency bloc in recent days has seen German 10-year yields come off recent lows.

Meanwhile, concerns have grown about how long the U.S. economic strength will last, as expressed by a bond yield curve that is at its flattest in 11 years.

“On the one hand, there is more concern about medium-term growth prospects in the U.S. and on the other, European wages are picking up,” said Commerzbank rates strategist Christoph Rieger.

Annual inflation in the euro zone to 2.1 percent in July, European statistics office Eurostat said on Friday, confirming the rate was above the European Central Bank’s target.

Also, the German economy picked up more pace than expected in the second quarter, driven by higher household and state spending, suggesting that it is powering ahead despite the threat of a major trade dispute with the United States.

“Also, speculative net shorts in the U.S. Treasury market is at record highs, which is limiting the upside to yields even as risk sentiment recovers,” Rieger added.

In addition to this, news that Paul Manafort, the former campaign chairman for U.S. President Donald Trump, was convicted on Tuesday of eight counts of financial wrongdoing, pushed U.S. Treasury yields lower late on Tuesday.

U.S. 10-year Treasury yields dipped to 2.83 percent, having hit the 3 percent at the start of the month.

German 10-year government bond yields were unchanged at 0.33 percent on Wednesday, having moved away from recent lows of 0.287 percent in recent sessions.

The spread between the two was at 250 bps, its tightest level in two months if you strip out after-hours trading, when the Bund Futures market is closed.

The spread is often used an indicator of how the monetary policy stances of the two regions are converging or diverging.

Other euro zone bond yields were also largely unchanged, though Italian bonds continued to find some demand after Moody’s on Monday said it was extending a ratings review for downgrade, providing some relief for that battered market.

Italy’s 10-year borrowing costs dropped a basis point to 2.95 percent, while the closely-watched spread over Germany was at 263 bps. (Reporting by Abhinav Ramnarayan; Editing by Jon Boyle)

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