The gap between US and German 10-year benchmark bond yields was a shade off its widest level in nearly three decades on Tuesday as the economic and monetary policy outlooks of the United States and euro zone start to take different paths. In thin trading on Tuesday with much of Europe on May Day holiday, US 10-year Treasury yields rose above 2.977 percent, extending the gap over their German counterpart.
The central bank is expected to hold US rates steady this week but is likely to encourage expectations further that it will increase them in June due to rising inflation and low unemployment. The Federal Open Market Committee (FOMC) is due to announce its decision at 2 pm EDT (1800 GMT) on Wednesday. Core euro zone bonds have picked up demand in recent days since a European Central Bank meeting on expectations that policymakers will adopt a relatively cautious stance.
The gap between 10-year German and US bond yields was at 240 basis points, less than a basis point off the widest level since March 1989 touched last week. Though this spread does not account for the different valuations of the currencies of either region, it still indicates how differently investors view the two regions in terms of how far central banks have to go in removing post-crisis stimulus.
In addition, the gap between British and US 10-year government bond yields hit its widest since 1984 on Tuesday, reflecting sharp shifts in interest rate expectations in the two countries in recent days.
Most euro zone bonds were roughly unchanged on the day, Italian yields rose a touch, having jumped 3-5 basis points across the curve on Monday on political jitters. On Tuesday, the Italy/Germany 10-year bond yield spread reached its widest in two weeks at 122 basis points following Monday's headlines that raised the possibility of an early election.
Elsewhere, Greek government bond yields stuck to the 2-1/2 months lows hit after OECD chief Angel Gurria said on Monday that Athens has made enormous reform efforts since its debt crisis broke out and deserved debt relief.