* EM bond yield spread to U.S. Treasuries falls to 3-year low
* Indian stocks hit record high on Modi reform hopes
* Rand steadies after rally, Chile peso extends winning streak
By Marc Jones
LONDON, Dec 20 (Reuters) - The premium investors get for buying emerging market government debt rather than U.S. Treasuries equalled a more a 3-year low on Wednesday, as a spurt up by U.S. yields added to the recent cheer around faster-growing developing economies.
The gap between the average JP Morgan emerging market bond index (EMBI) yield versus 10-year U.S. government debt narrowed to 278 basis points, to leave it equal with a low struck in late October after which it goes back to September 2014.
It came as a combination of U.S. tax cut optimism and talk of a formal end date for the European Central Bank’s 2.5 trillion euro stimulus programme put the U.S. yield curve on course for its biggest weekly steepening since early July.
The dollar though has remained unusually unresponsive, which is seen as positive for emerging markets who as a group are now borrowing record amounts of debt in dollars.
Indian shares hit record highs as Prime Minister Narendra Modi’s electoral victories in key states continued to lend support, though with trading already winding down for the year, MSCI’s 24-country EM index was flat overall.
“The U.S. bond market has been the million dollar question for the whole year and it has ended pretty much where it started,” said fund manager GAM’s EM equities investment director Tim Love.
Following the more than 30 percent surge in EM stocks this year and some even bigger gains in China and technology shares, Love added: “I think it is time for people to stick to their knitting rather than chase the fat.”
Among currencies, China’s yuan strengthened through the day too, reaching its highest level in three months against the dollar, helped by a firmer fixing from the country’s central bank and year-end dollar sales.
The proportion - or weighting - of China-linked stocks on MSCI’s share index in now 26.5 percent compared to 15 percent 4 years ago. Next year it will rise further to roughly 32 percent.
South Africa’s rand meanwhile gave back around 0.25 percent of the 9 percent it has made over the last week as the market’s preferred candidate, Cyril Ramaphosa, has been elected the new leader of the ruling ANC party.
That left it worth 12.75 to the dollar, though Chile and Argentina’s currencies were also drawing interest.
A sixth day of gains for Chile’s peso took its rise since Conservative Sebastian Pinera won the country’s presidential election by a wide margin on Sunday past 6 percent.
Argentina’s peso has been almost the opposite, falling for four days running and over 2.5 percent in total.
The Thai baht had been Asia’s worst performer, slipping as much as 0.6 percent until the central bank there raised its growth forecasts at an end of year meeting where it kept its main interest rate at 1.5 percent.
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Reporting by Marc Jones; Editing by Raissa Kasolowsky