March 9, 2017 / 12:46 PM / 5 months ago

UPDATE 1-German-U.S. bond yield spread near 8-week high before ECB decision

* Policy divergence keeps open gap between Bunds, Treasuries

* ECB expected to stay loose despite imminent Fed rate hike

* France 's Macron takes 1st round lead in poll for 1st time

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds quotes, updates prices)

By Abhinav Ramnarayan

LONDON, March 9 (Reuters) - The gap between German and U.S. government bond yields held near eight-week highs as investors awaited news from Thursday's ECB meeting, expected to highlight the monetary policy divergence between the two regions.

Higher-than-expected U.S. private sector employment numbers on Wednesday boosted already high chances of a rate hike when the Federal Reserve meets next week and increases the likelihood 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.

"We expect there will be four (Fed) rate hikes this year. Against that you have the ECB that's likely to be on hold for the rest of the year," said Nick Gartside, international CIO of fixed income, JPMorgan Asset Management.

In a reflection of that sharp contrast in monetary policy, the gap between the 10-year borrowing costs of Germany and the United States hit 220 basis points.

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.

"It's a tale of two central banks... so that spread is likely to remain wide over the coming months," Gartside said.

ING strategists said the central bank in Frankfurt would look to soothe nerves on Thursday 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.

Euro zone inflation surged to a four-year high of 2 percent last month, just topping the European Central Bank's target, but underlying inflation held steady at 0.9 percent.

While German government bond yields were flat on the day, most other high-rated euro zone bond yields fell 1-2 bps ahead of the ECB policy decision.

Lower-rated euro zone government bond yields fell 4-6 bps. The likes of Spain, Italy and Portugal are generally seen as bigger beneficiaries of accommodative monetary policy than their higher-rated counterparts.

The gap between France and Germany's 10-year borrowing costs narrowed on Thursday after a poll showed that centrist Emmanuel Macron would beat far-right leader Marine Le Pen in presidential elections in May.

The yield spread fell 3 basis points to 63 bps on Thursday. ,

That put it well off the 84 bps it hit early this year - the highest since late 2012 - on concerns that Le Pen would win and attempt to take France out of the single currency.

Reporting by Abhinav Ramnarayan; editing by John Stonestreet

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