May 4, 2018 / 8:08 AM / 18 days ago

Inflation divergence drives German/U.S. yield gap near 3-decade high

* Germany/U.S. spreads near widest since 1989

* U.S. payroll data should offer inflation clues

* Report quotes 5-Star Movement head repeating election call

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

By Abhinav Ramnarayan

LONDON, May 4 (Reuters) - The difference between German and U.S. government bond yields was close to its highest in nearly three decades on Friday ahead of the release of U.S. jobs data that could further demonstrate the countries’ different inflation paths.

Both the short-dated and long-dated “transatlantic spread” between U.S. Treasuries and German Bunds were just a shade away from their highest levels since early 1989 at 307 and 241 basis points respectively.

And they could go even wider, depending on the U.S. payroll data to be released at 13.30 GMT, said one analyst.

“There will be a close look to average hourly earnings in the U.S. jobs report today for any guidance regarding future inflation,” said DZ Bank analyst Rene Albrecht.

“The next mark we could see is 250 bps (on the 10-year transatlantic spread) if we get different inflation dynamics in the U.S. and Europe,” he said, though he added that the spread should tighten in the long term with the U.S. so close to full employment.

The dollar meanwhile, is set for its third consecutive week of gains against a basket of currencies and is up 3.6 percent in the last two weeks against the euro.

Euro zone inflation has been staying stubbornly low despite the ECB throwing a 2.55 trillion euro kitchen sink at it.

Inflation in the bloc, at 1.2 percent, fell short of expectations in the first quarter of the year, while the figure after stripping out the effects of energy, processed food, alcohol and tobacco was even more dramatically low at 0.7 percent.

U.S. consumer prices, on the other hand, accelerated in the year to March towards the Federal Reserve’s 2 percent target.

This means that the Fed should go ahead with rate hikes this year while prospects for a European Central Bank rate hike keep getting pushed further down the line.

Euro zone bond yields dropped on Thursday after that inflation data came out, and though most high-rated euro zone debt was unchanged on Friday, German 10-year borrowing costs were set for a second straight weekly fall.

At 0.53 percent, it is now well off its yearly peak of 0.81 percent hit in February.

A market gauge of long-term inflation expectations, the five-year five-year forward swap, is back below the 1.70 percent mark, closing Thursday at 1.6935 percent.

Meanwhile, Southern European government bonds, seen as the biggest beneficiaries of ECB stimulus, were in demand with Spanish, Italian and Portuguese 10-year yields lower 1-3 basis points.

This came even though the political situation in Italy continues to tread an uncertain path.

The leader of the country’s anti-establishment 5-Star Movement dismissed proposals for a stop-gap government to reform the electoral law and repeated his call for a snap election in June, according to a newspaper interview on Friday. (Reporting by Abhinav Ramnarayan Editing by Peter Graff)

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