4 Min Read
* Fed officials jolt market with talk of pending rate hike
* Bond yields broadly higher, led by U.S.
* Gap between US/German 2-year yields widest in 17 years
* French yields fell on report Fillon summoned by magistrates
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Dhara Ranasinghe
LONDON, March 1 (Reuters) - The gap between short-dated German and U.S. government bond yields was at its widest since 2000 on Wednesday, as U.S. Federal Reserve officials jolted the markets into higher expectations for a hike in interest rates this month.
French government bond yields fell, meanwhile, tightening the gap with German peers after a report that conservative presidential candidate Francois Fillon has been summoned by the magistrates investigating a case involving payments to his wife.
Two-year U.S. Treasury yields rose to their highest level since December after comments from Fed policy makers suggested rate-setters are worried about waiting too long in the face of looming economic stimulus from Washington.
Their German peers have pulled away from record lows hit last week at minus 0.96 percent, but remain well anchored by the European Central Bank's bond-buying stimulus programme.
That led to the gap between short-dated bond yields in the U.S. and Germany widening to around 220 basis points -- levels not seen in almost 17 years.
The U.S./German 10-year yield spread was its widest in two months at around 221 basis points.
New York Fed President William Dudley, among the most influential U.S. central bankers, said on Tuesday that the case for tightening monetary policy "has become a lot more compelling" since the election of President Donald Trump and a Republican-controlled Congress.
"The key thing is that the market has taken on board what the likes of Dudley, in particular, has said as he's usually a centrist. And so the thinking is that the Fed will hike sooner rather than later," said Orlando Green, European fixed income strategist at Credit Agricole.
"As the markets start to price in a March rate hike, that will pull up Bund yields, but clearly U.S. Treasuries will sell off more."
Financial markets are now pricing in about a 68 percent chance of a rate hike at the Fed's March 14-15 meeting, up from roughly 31 percent late on Monday.
In addition to Dudley's comments, San Francisco Fed president John Williams said that with the economy at full employment, inflation headed higher and upside risks from potential tax cuts waiting in the wings, "I personally don’t see any need to delay" raising rates.
Trump on Tuesday meanwhile promised "massive" tax relief to the middle class and tax cuts for companies, but offered few details on how they would be achieved.
Across the euro zone, 10-year yields were up 1-3 basis points. Germany is scheduled to sell 3 billion euros of 10-year bonds, which analysts said markets should easily absorb given their relatively small size.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Editing by Hugh Lawson