LONDON: The gap between German and US government bond yields held near eight-week highs as investors awaited news from Thursday's ECB meeting, which is expected to highlight the monetary policy divergence between the two regions.
Higher-than-expected US private sector employment numbers on Wednesday boosted already-high chances of a rate hike when the Federal Reserve meets next week and increases the chances of further hikes later in 2017.
But in the euro zone, ECB President Mario Draghi is likely to resist hawkish calls and maintain an ultra-loose policy stance despite accelerating inflation, analysts said.
ING strategists said the central bank in Frankfurt would look to soothe nerves ahead of potentially fractious elections in the Netherlands and France, though recent polls have shown momentum for far-right parties abating.
"The ECB will wait to see the political risks out of the way and convincing signs that underlying inflation is on an upward trajectory before tightening," said ING strategist Martin van Vliet.
"There's been a lot of talk about (the ECB) changing the forward guidance but we think that's premature," he said, a view echoed by at least one other analyst.
Euro zone inflation surged to a four-year high of 2 percent last month, zooming past the European Central Bank's target, but underlying inflation held steady at 0.9 percent.
In a reflection of the sharp contrast in monetary policy on either side of the Atlantic, the gap between the 10-year borrowing costs of Germany and the United States hit 220 basis points in early trade.
This was a shade below an eight-week high hit earlier this week and only 16 bps below the December 2016 peak of 236 bps, which was the widest since at least 1990.
Most euro zone bond yields were 1-2 bps higher before the ECB policy decision, with 10-year German yields rising 1.6 bps to 0.39 percent.
MACRON BOOST
France's 10-year government bond yield was up 1.2 bps on Thursday at 1.05 percent, largely in line with the rest of the market.
There were further signs of a loss of momentum for French far-right presidential election candidate Marine Le Pen, after a poll showed centrist Emmanuel Macron would come out ahead in the first round before winning a runoff against her.
A Le Pen victory would be viewed with disfavour by the market as she has said she plans to hold a referendum to take France out of the single currency, potentially a hugely disruptive event for the region.
"Le Pen seems to be losing a bit of momentum in the polls and you see the same thing in the Netherlands (with nationalist candidate) Geert Wilders," said van Vliet.
"...Let's see what the Dutch elections will bring - because it will be a test whether the polls are accurate."
The Dutch parliamentary elections are scheduled for March 15. Dutch 10-year government bond yields hit a near three-week high of 0.506 percent on Thursday, up 2 bps on the day.
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