December 27, 2017 / 9:26 AM / in a year

Short-dated German yields rise as U.S. curve flattens further

* Schatz yields close to 2-1/2 month high at minus 0.67 bps

* Most 10-year euro zone yields edge 1-2 bps lower

* Euro zone periphery govt bond yields

By Abhinav Ramnarayan

LONDON, Dec 27 (Reuters) - Short-dated German government bond yields were close to a 2-1/2 month high on Wednesday, tracking market developments across the Atlantic after equivalent U.S. Treasury yields rose to their highest levels since 2008 overnight.

The U.S. Treasury curve has been flattening all year as investors price in rising benchmark interest rates against a backdrop of subdued inflation. The same trend is visible in Europe, where an eventual withdrawal of stimulus by the ECB is being anticipated.

“I think we are seeing some flattening in the Bund yield curve driven by the U.S. and some anticipation of an (ECB) rate hike maybe in mid-2019,” said DZ Bank strategist Christian Lenk.

“Either way, investors are starting to believe that we won’t see minus 75 basis points again (on the Schatz yield), so why not grab some profits here as yields normalise to some degree,” he said.

Earlier this month, the ECB raised its growth forecasts for the euro zone from this year through to 2019 and nudged up its expectations for inflation to 1.7 percent, closer to its target of just below 2 percent.

The Schatz yield rose one basis point to minus 0.67 percent on Wednesday, within a whisker of the minus 0.669 percent hit on Friday, which was the highest level for German two-year yields since Oct. 2, according to Tradeweb data.

The gap between German 2-year and 10-year yields narrowed to 108 basis points.

While still deep in negative territory, the Schatz yield has risen significantly since early 2017, when it dipped as low as minus 0.96 percent.

It was pushed to those levels as the ECB concentrated its bond-buying scheme around short-dated bonds.

Yields on most high-grade euro zone bonds in the 10-year part of the curve edged lower on Wednesday as a risk-off sentiment pervaded the market following last week’s election victory for secessionist parties in Catalonia.

The Spanish region’s deposed separatist leader Carles Puigdemont last weekend called on the Madrid government to allow him to return home from self-imposed exile in Brussels for the opening session of the Catalan parliament so that he can become its next president.

Most euro zone bond yields were 1-2 bps lower with Germany’s 10-year government bond yield, the benchmark for the region, dropping nearly 2 bps to 0.40 percent.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=

Reporting by Abhinav Ramnarayan; editing by John Stonestreet

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