* Gap between German 2- and 10-yr yields at 93 bps
* Germany due to sell 4 bln euros of 2-year “Schatz”
* U.S. curve at flattest in 11 years, Trump criticises Fed
* Italian yields dip as Moody’s extends downgrade review
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, Aug 21 (Reuters) - The gap between short and long-dated German government bond yields was close to its narrowest in over a year before an auction of two-year debt on Tuesday, partly because of a similar but sharper move in U.S. Treasuries.
With Germany due to sell 4 billion euros of two-year Schatz bonds later in the day, the spread between this debt and 10-year German bonds was at around 93 basis points, slightly off a one-year low of 92.5 bps hit on Friday.
This was after the U.S. Treasury yield curve — gauging the difference between short and long-term borrowing costs — hit its flattest level in 11 years on Monday at 23 basis points.
Ten-year U.S. yields have hit a six-week trough, pushed lower as investors seek safe havens due to global trade tensions and a currency crisis in Turkey, while bets on interest rate increases have pushed 2-year yields higher.
“The fact that U.S. Treasuries rallied to the 2.80 percent level meant that the U.S. curve is at its flattest in many years, this could also be impacting the German curve,” said ING strategist Martin van Vliet.
He also referred to reports suggesting the European Central Bank may target longer-dated debt in its asset purchase programme. “The possibility of ‘Operation Twist’ also means that (demand for) two-year Schatz is lagging a bit the 10 and 30-year part of the curve,” he added.
Minutes from the Federal Reserve’s August meeting on Wednesday should give clues on how likely a September rate rise is, and an international meeting of central bankers at Jackson Hole on Friday will be scanned for hints on policy either side of the Atlantic.
President Donald Trump said on Monday he was “not thrilled” with the Federal Reserve under his own appointee, Chairman Jerome Powell, for raising interest rates and said the U.S. central bank should do more to help him to boost the economy.
The market appeared to see through this, with both two- and 10-year U.S. Treasury yields a touch higher on Tuesday.
Italian government bond yields dipped further towards the 3 percent mark, having already dropped sharply on Monday, as Moody’s extended its review of the country’s sovereign rating for a potential downgrade to October.
Though this isn’t good news in itself, it gives investors more time to take advantage of the extra yield Italy is offering, said ING’s Van Vliet.
Italian 10-year bond yields were two bps lower on the day and eight bps this week so far at 3.03 percent, while the spread over Germany was at its tightest in a week at 272 bps. (Reporting by Abhinav Ramnarayan; editing by David Stamp)