U.S. and German bond
yield gap shrinks on Trumpflation doubts
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[March 22, 2017]
By John Geddie
(Reuters) - The premium that investors demand to hold U.S. over German
government debt was the lowest it has been in four months on Wednesday
as investors began to doubt promises of a fiscal boost for the world's
President Donald Trump is trying to rally support behind his healthcare
bill, but investors are worried failure to do so would signal trouble
for promised tax cuts and relaxed regulation that are expected to
support growth, inflation and tighter monetary policy.
The bill, to be debated in the U.S. House of Representatives from
Thursday, might fail because some quarters of the Republican party
oppose it and Democrats are united against it.
As U.S. shares suffered their worst day on Tuesday since Trump's
election in November, investors headed back into the safety of
government bonds, sending U.S. 10-year yields to a three-week low of
2.40 percent on Wednesday <US10YT=RR>.
Meanwhile, German yields <DE10YT=RR> dropped with other euro zone
equivalents on Wednesday, but they remain within sight of 13-month highs
struck just over a week ago. At around 195 basis points, the gap between
the two was the smallest since November.
Euro zone yields have been propped up in recent weeks by speculation
that the European Central Bank may tighten monetary conditions in the
euro zone sooner than expected.
"Market participants are worried about the effects and feasibility of
Donald Trump's growth program," DZ Bank strategist Birgit Figge said.
"Alongside this, speculation is persisting ...that the ECB may possibly
scale back its ultra-expansionary policy stance to some extent at an
earlier point in time than is currently being assumed."
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note to clients on Wednesday, Barclays said it expected the ECB to further
reduce government bond purchases in the first half of 2018 while it starts to
raise its deposit rate.
Money markets are fully priced for a 10 basis point hike from the ECB by March
In further evidence for those arguing for tighter policy, data on Wednesday
showed that real wages in Germany rose by 1.8 percent last year, weaker than in
2015, as higher inflation bites.
Lower-rated euro zone bond yields fell faster than benchmark German bond yields
as political risks ebbed and the latest dose of cheap central bank loans due
Thursday were seen supporting the bloc's most vulnerable states.
A poll showed centrist Emmanuel Macron increasing his lead over eurosceptic,
far-right leader Marine Le Pen in the race for the French presidency concluding
in May, one of a number of major electoral tests for the euro zone this year.
The gap between Portuguese <PT10YT=TWEB> and German 10-year yields hit its
lowest in around three months at 345 basis points and the gap between Spanish
and German equivalents hit its lowest in just over a month at 132 basis points.
At the auctions, Germany sold 2.5 billion euros of 10-year bonds. [EURODEBT/O]
(Editing by Nigel Stephenson and Mark Trevelyan)
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