November 1, 2017 / 11:52 AM / a year ago

UPDATE 4-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 (Updates prices, adds U.S. data)

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 in southern European debt markets seen as the biggest beneficiaries of ECB largesse.

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

“The macro-economic backdrop is causing a divergence between the two currency zones. The ECB has confirmed they will be buying bonds for another year, whereas the Fed is hiking rates,” said Mizuho strategist Antoine Bouvet.

“On top of that, in the U.S. we have the announcement of the next Fed chair and question marks over fiscal policy which could prove bearish for U.S. Treasuries.”

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

It stood at around 200 basis points in late trade.

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.

They dipped on Wednesday after a measure of U.S. factory activity retreated from a 13-1/2-year high in October.

In the euro area, Germany’s 10-year Bund yield edged higher to 0.37 percent. Most other high-grade euro zone bond yields were 1-2 basis points higher on the day.

The rally in southern European government debt showed no sign of abating: the yield on Italy’s 10-year borrowing costs dropped below 1.80 percent for the first time since January.

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

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

Reporting by Abhinav Ramnarayan; Editing by Alison Williams

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