* Germany's two-year bond yield drops to record low
* U.S. equivalent sneaks up ahead of Fed minutes
* Gap between the two benchmarks widest in 17 years
* Spanish yields rise as country sells 15-year debt
By John Geddie
LONDON, Feb 22 The gap between short-dated
German and U.S. government bond yields stood at its widest in
nearly 17 years on Wednesday as the former fell to record lows
and the latter nudged up in anticipation of rate increase
In a move seemingly out of kilter with broader moves in euro
zone bond markets, German two-year yields dropped to a record
low of minus 0.88 percent on Wednesday.
Analysts said jitters around upcoming French elections have
stoked demand for an asset seen as one of the safest in the euro
zone. Bottlenecks caused by the European Central Bank's
bond-buying programme and upcoming regulatory changes have
amplified the decline the yields, which move inversely to
U.S two-year yields have been sneaking higher in
recent days, reaching 1.24 percent -- within sight of a
seven-year high breached at the end of 2016 -- as investors
start to price in an outside chance the Federal Reserve will
raise interest rates next month.
The two-year's yield is some 212 basis points above its
German equivalent, the biggest gap since early 2000.
U.S. Federal Reserve Chair Janet Yellen said last week a
rate increase in the world's largest economy would be considered
at every policy meeting. Wednesday's release of the minutes of
the central bank's last meeting are expected to provide more
clues on the timing.
Money markets suggest a roughly one in five chance the Fed
will raise rates at its meeting next month, according to CME's
FedWatch tool. Some banks call it as high as a 40 percent
Philadelphia Fed President Patrick Harker on Tuesday said he
would support a rate increase at a mid-March policy meeting as
long as inflation, output and other data continue to show a
growing U.S. economy.
"There are a host of special factors driving two-year German
bond yields lower and on the other side of the Atlantic we have
the Fed contemplating another hike, which is driving up U.S.
equivalents," ING strategist Martin van Vliet said.
Elsewhere in the euro area, investors sold Spanish and other
low-rated bonds on Wednesday to make room in their portfolios
for new 15-year debt that Madrid is selling.
Spain has already gathered more than 11.5 billion euros of
indications of interest in its new deal, according to IFR, and
is expected to price the bond later on Wednesday.
Spanish, Italian and Portuguese bond yields all edged up
around 3 basis points to 1.70 percent, 2.25
percent and 4.07 percent,
This stretched the gap to benchmark the German equivalents,
which were flat at 0.31 percent. Berlin is also
scheduled to sell 30-year debt at an auction on Wednesday.
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 Larry King)