German-US bond yield gap widest since dawn of millennium

LONDON: The gap between short-dated German and US government bond yields stood at its widest in nearly 17 years on Wednesday as the former fell to record lows and the latter nudged up in anticipation of rate increase signals.

German two-year yields dropped to minus 0.92 percent , pulling the country's 10-year yields to a five-week low of 0.25 percent. Analysts said jitters around upcoming French elections have stoked demand for an asset seen as one of the safest in the euro zone.

Bottlenecks caused by the European Central Bank's bond-buying programme and upcoming regulatory changes have amplified the decline in the yields, which move inversely to prices.

U.S two-year yields have meanwhile been sneaking higher in recent days, reaching 1.24 percent -- within sight of a seven-year high breached at the end of 2016 -- as investors start to price in an outside chance the Federal Reserve will raise interest rates next month.

The US yield reached some 212 basis points above its German equivalent, the biggest gap since early 2000.

Fed Chair Janet Yellen said last week a rate increase in the world's largest economy would be considered at every policy meeting. Wednesday's release of the minutes of the central bank's last meeting are expected to provide more clues on the timing.

Money markets suggest a roughly one in five chance the Fed will raise rates next month, according to CME's FedWatch tool. Some banks call it as high as a 40 percent chance.

Philadelphia Fed President Patrick Harker on Tuesday said he would support a rate increase at the mid-March policy meeting as long as inflation, output and other data continue to show a growing US economy.

"There are a host of special factors driving two-year German bond yields lower and on the other side of the Atlantic we have the Fed contemplating another hike," ING strategist Martin van Vliet said.

Elsewhere in the euro zone, Spanish and other lower-rated bond yields were little changed, also stretching the gap to German equivalents.

Analysts said a 15-year debt sale from Spain was preventing peripheral yields from falling as some investors sold outstanding bonds to make room in their portfolios for the new supply.

Spain took more than 14 billion euros of orders for the 5 billion euro bond, set to be priced later on Wednesday, according to IFR.

Berlin sold around 500 million euros at auction in a top-up of its 30-year bond.