U.S./Bund yield gap widest since 1999 as economies, c.banks diverge

Thu Jul 3, 2014 11:57am EDT

* U.S. firms hire 281,000 workers in June, beating
expectations
    * ECB's Draghi says June measures should lift lending
    * ECB prepared to print money if needed
    * U.S./Bund yield gap widest since 1999 at around 137 bps

 (Recasts with U.S. data, Draghi news conference)
    By Marius Zaharia
    LONDON, July 3 (Reuters) - The yield premium U.S. bonds
offered over German debt rose to its highest since 1999 on
Thursday as the ECB looked to step up  efforts to boost a
sluggish euro zone economy while data showed the U.S. jobs
market taking off.
    The Labor Department in Washington said unemployment was
closing in on a six-year low and non-farm payrolls increased by
288,000 jobs in June. It was the first time since the technology
boom in the late 1990s that employment has grown above a
200,000-jobs pace for five straight months. 
    In Frankfurt, European Central Bank President Mario Draghi
fleshed out the terms of planned long-term loans aimed to push
commercial banks to lend more to a credit-starved economy
struggling to grow and dealing with very low inflation.
    Draghi also said the ECB was prepared to print money if the
bank's assessment of the inflation outlook changed, distancing
his stance from that of the U.S. Federal Reserve, which is
slowing down the pace of its monetary stimulus.
    "There is a much clear difference now between the two
monetary policies. You have at least the carrot of quantitative
easing in the euro zone," said Philip Shaw, chief economist at
Investec, referring to the specialist term for central banks
printing money by buying assets.
    The yield on 10-year U.S. T-notes rose 3 basis
points to 2.66 percent, while German 10-year yields 
were virtually flat at 1.29 percent, which was close to their
record lows. Earlier in the day the difference between them was
as big as 137 bps, the highest in 15 years.
    In the past year, the gap widened by about half a point.
    Some analysts say Bund yields, which are still close to the
record lows hit at the height of the euro zone debt crisis in
2012, are anchoring yields across the world. A recovering
economy and a looming turn in monetary policy in the United
States would justify higher T-note yields, for instance.
    "The comparison with Germany is made on a daily basis with
clients here," said David Keeble, global head of fixed income
strategy at Credit Agricole in New York.
    "Had Bunds not been so low in yields, maybe U.S. Treasuries
would have been higher. The hunt for yield ... is prevalent and
the first trade we've seen after the pop in yields in the U.S.
was buying of Treasuries against Bunds."
     
    HOT MARKET
    The push for yield fueled by the ECB's ultra-easy policy was
also evident in the euro zone's lowest-rated bond markets.
Spanish, Italian and Portuguese
 10-year yields were all 4-5 bps lower at 2.69
percent, 2.75 percent and 3.61 percent respectively.
    The southern European countries are looking to take full
advantage of the renewed appetite for their relatively
high-yielding debt. Spain sold a 30-year bond at the lowest
yield since 2006 and raised a total of 4.5 billion euros to
complete over 70 percent of its 2014 bond issuance goal.
 
    Portugal raised $4.5 billion on Wednesday in its first
dollar bond sale since March 2010 as it sought to build up cash
buffers to fund near-term debt repayments. 
    "You do get the feeling the Europeans will do what they have
to do to avoid a deflationary environment," said Alan McQuaid,
chief economist at Merrion Stockbrokers in London. "In terms of
the periphery, it's got to be positive for them."

 (Editing by Tom Heneghan)
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