* German 10-year bonds hit highest since early August at 0.48 pct
* Spain underperforms as Catalonia protests break out overnight
* Greek bonds steady as Reuters reports bond exchange plans
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, Sept 21 (Reuters) - German bond yields hit their highest level since early August after policymakers in the United States signalled they expect to raise interest rates one more time this year.
The U.S. Federal Reserve also said it would begin in October to reduce its approximately $4.2 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.
“While the announcement that the balance sheet run-off will start in October was well flagged, the unchanged median rate path for this year and the next implied by the dot plot caught markets by surprise,” said ING strategist Martin Van Vliet.
This pushed two-year U.S. Treasuries to its highest since November 2008, which the 10-year hit a six-week high of 2.89 percent. Euro zone government bonds followed suit in early trade on Thursday, rising 3-4 bps across the board.
Government bonds of the world’s major developed economies tend to move together as many investors shift between them.
In addition, the European Central Bank is largely expected to take its cue from its U.S. counterpart and move towards tighter policy in the coming months.
ECB President Mario Draghi is due to speak on Thursday afternoon at a conference on financial stability, while board member Peter Praet chairs a policy panel at an ECB conference late morning.
The yield on Germany’s 10-year government, the benchmark for the region, was 4 basis points higher in early trade at 0.48 percent, its highest since early August.
The gap between United States and German 10-year borrowing costs widened to 184 bps on Wednesday — its highest in a month — before tightening a touch on Thursday.
German bund futures opened 40 ticks lower at 160.92.
Later today, Spain is due to auction 4-5 billion euros of bonds, a day after tensions between Madrid and the wantaway region of Catalonia led tens of thousands of protesters to march through the streets of Barcelona.
The protests came after Spanish police raided Catalan government offices and arrested officials on Wednesday to halt a banned referendum on independence, an action the regional president said meant Madrid had effectively taken over his administration.
Spanish government bonds, having underperformed on Wednesday, moved roughly in line with peers on Thursday, the 10-year yield rising 4 bps to top 1.50 percent for the first time in nearly a month.
The bond yield spread over Germany was steady at 102.5 bps, having widened on Wednesday from the opening level of 98.5 bps.
“The central Spanish government’s increasingly rigorous line of action in response to Catalonia’s aspirations to independence triggered profit-taking on Spanish debt instruments, which subsequently spilled over to BTPs,” DZ Bank analyst Rene Abrecht said.
Greek government bond yields were steady on Thursday ahead of trading hours after Reuters reported late on Wednesday the country is considering swapping 20 small bond issues for four or five new ones as it prepares to exit its international bailout.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Abhinav Ramnarayan; Editing by Matthew Mpoke Bigg