February 15, 2018 / 8:55 AM / 3 months ago

UPDATE 3-US/German bond yield gap hits 10-month high as U.S. inflation bites

* “Transatlantic spread” hits 216 bps, highest since April 2017

* Inflation triggers fresh U.S. Treasury sell-off

* Political risk caps European government bond yields (Updates prices)

By Abhinav Ramnarayan

LONDON, Feb 15 (Reuters) - The gap between German and U.S. 10-year borrowing costs reached its widest point since April on Thursday after higher-than-expected inflation in the United States led to a sharp sell-off in U.S. Treasuries.

While investors also shed European government bonds after Wednesday’s inflation data, political risks kept a cap on yields.

The yield on 10-year U.S. Treasuries, which moves inversely to price, touched a fresh four-year high of 2.94 percent in European trade, following the news that consumer prices rose more than expected in the world’s largest economy in January. Data on Thursday meanwhile showed U.S. producer prices accelerated in January.

A pick up in inflation raises pressure on new Federal Reserve chief Jerome Powell to prevent a possible overheating of the economy.

“The inflation data weighed on the U.S. Treasury market, and now you will have fiscal stimulus when the economy is running at full employment,” said Commerzbank strategist Michael Leister, referring to U.S. President Donald Trump’s $200 billion infrastructure spending plan.

“But in Europe the risks have become a bit more balanced and there’s still some demand for Bunds,” he said.

Though European bond yields have risen sharply since the start of December, this move has lost some steam as concerns around German coalition talks and an upcoming Italian election renewed the bid for “safe haven” bonds.

In addition, while most expect the European Central Bank to reduce extraordinary stimulus sooner rather than later, rate hikes are still a good distance away with a booming European economy yet to leave a lasting mark on inflation.

German 10-year government bond yields were a basis point higher at 0.76 percent on Thursday, holding below recent 2-1/2-year highs of 0.81 percent.

The “transatlantic spread” between U.S. and German 10-year government bond yields opened Thursday at 216 basis points, a level last seen 10 months ago.

Most other euro zone government bond yields were also higher by 1-2 bps, partly driven upwards by large bond sales by Spain and France on the day.

German 2-year bond yields briefly rose to their highest since May 2016 at minus 0.47 percent, while 30-year bond yields touched their highest in over a year.

The move towards higher yields across the euro zone has boosted demand in some quarters, and this was on display at Thursday’s auctions.

France was swamped with demand as investors put in enough orders to cover an 8 billion euro sale of bonds twice over, while Spain also generated strong demand, particularly for its shorter-dated debt.

“I have been watching to see at what point these positive yields on semi-core bonds start attracting international investors, and so for me this France result looks pretty interesting,” said Mizuho strategist Antoine Bouvet.

Reporting by Abhinav Ramnarayan; Editing by Jon Boyle

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