US/German 10-year yield gap at 13-month high as bonds await Fed

AMSTERDAM: German benchmark bond yields rose but outperformed US Treasuries ahead of the US Federal Reserve's meeting on Wednesday, pushing the yield differential between the two markets' benchmark bonds to the highest since February 2020.

US benchmark Treasury yields rose to a 13-month high as caution set in ahead of the Fed's latest policy decision.

Expectations vast US fiscal stimulus will boost economic growth and cause inflation to rebound have pushed government bond yields higher in recent weeks.

Markets will focus on the Fed's so-called "dot plot," which shows the outlook for its policy rate. While some economists expect this will show one rate hike for 2023 versus none in December, an unchanged median dot for that year could be interpreted as Fed push-back against the recent bond market sell-off.

Though they also rose, analysts said the European Central Bank's decision to accelerate its pandemic emergency bond purchases last week, and delays in the bloc's vaccine roll-out topped by a temporary halt to AstraZeneca vaccinations kept the bloc's bond yields in check.

At 1151 GMT, Germany's 10-year yield, the benchmark for the bloc, was up over 2 basis points to -0.31%, outperforming equivalent US Treasuries, which rose 4 bps on the day. Bond yields move inversely with prices.

The outperformance of German bonds pushed the gap between 10-year German and US yields to nearly 198 basis points, the highest since February 2020.

Richard McGuire, head of rates strategy at Rabobank, said euro zone bonds were also likely under pressure from longer-dated issuance from Germany and Greece during the session, which tends to push up yields on existing bonds.

Greece was due to raise 2.5 billion euros from its first 30-year bond sale since 2008, receiving over 26 billion euros of investor demand, while Germany raised 1.22 billion euros from a re-opening of 30-year bonds.

Luxembourg is also selling a new 10-year bond via a syndicate of banks, a lead manager memo seen by Reuters showed.

Elsewhere, Italy raised 2.5 billion euros via a bond due 2031 in an exchange auction, the maximum planned amount.