UPDATE 2-Gap between US and German bond yields around narrowest in two years

(Updates prices) By Alun John LONDON, April 13 (Reuters) - The gap between U.S. and German 10-year government bond yields was around its narrowest in two years on Thursday, reflecting expectations that euro zone interest rates will rise more sharply than U.S. rates in the short term. The 10-year Bund yield , the benchmark for the euro zone, was at 2.36%, flat on the day, moving back from a small dip after Reuters reported European Central Bank policymakers are converging on a 25 basis point interest rate hike in May, though other options remain on the table. Nonetheless, the German 10-year yield has risen roughly 18 bps in the previous two trading sessions, a continuation of its rise from a low of 1.92% in mid March at the height of the turmoil in the banking sector.

Markets have moved to price in roughly 75 bps of rate hikes from the European Central Bank, with the November 2023 ECB euro short-term rate (ESTR) forward at 3.58%. In a sign of the range of views on the ECB's Governing Council, Robert Holzmann, one the most hawkish members of the rate-setting panel and the head of Austria's central bank, told a German newspaper in comments published on Wednesday that the ECB needs to keep hiking interest rates and that another 50-basis-point hike in May is warranted. In contrast, U.S. yields are much closer to their March lows.

The 10-year Treasury yield was at 3.41% , after its recent climb was wiped out by Wednesday's data showing a slowing in headline consumer price growth, and by the Fed's minutes from its March meeting that showed policymakers considered pausing interest rate increases after the failure of two regional banks. U.S. Treasury yields slid after data showed a surprise decline in producer prices and an uptick in jobless claims. The spread between the U.S. and German 10-years was as low as 100.93 bps on Wednesday, its narrowest since April 2020. . It was last around 104 and a break past 100.58 would make it the narrowest since 2014.

The gap was over 200 bps in November last year.

A "market theme that has crystallised surrounding the CPI release is that of further convergence between US and EUR rates – while the UST curve bull steepened, the Bund curve bear flattened," said ING analysts in a note.

"In contrast to the U.S., the European Central Bank is finding some comfort in the fact that financial stresses have remained relatively contained in the euro area," ING analysts said. "Prospects of limited banking fall-out have allowed ECB officials to refocus their attention on the issue of sticky core inflation again."

Italy's 10-year yield, a yardstick for the European periphery, was a whisker higher at 4.22% .

Short-dated yields were steady with the German two-year yield at 2.77%, and Italy's two-year yield up 2 bps at 3.33%.
(Reporting by Alun John; Editing by David Holmes and Susan Fenton)

Reuters

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UPDATE 2-Gap between US and German bond yields around narrowest in two years

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