October 20, 2017 / 4:04 PM / a year ago

UPDATE 4-U.S. tax vote triggers euro zone bond sell off

* Investors shed bonds on “Trumpflation trade”

* Euro zone yields rise 3-6 bps, track U.S.

* Bund yields set for biggest 1-day jump in over 5 wks

* Moody’s to review Spain rating Friday evening

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds context, updates prices)

By Abhinav Ramnarayan and Fanny Potkin

LONDON, Oct 20 (Reuters) - Euro zone government bond yields rose across the board on Friday, tracking a similar move in the United States after lawmakers there approved a budget resolution that brought the “Trumpflation trade” back into focus.

The vote by the U.S Senate late Thursday raised expectations that the Republican-controlled Congress and U.S. President Donald Trump would be able to enact a tax-cut package that could widen the federal deficit by up to $1.5 trillion over the next decade.

“This basically means we could see the revamp of the Trumpflation trade,” said ING strategist Martin van Vliet. “There are still some steps to go but the bottom line is that the door to tax cuts has opened a bit further.”

As 10-year U.S. Treasury yields jumped to two-week highs at around 2.39 percent, bond yields across the euro zone rose 3-6 basis points.

In Germany, the bloc’s benchmark bond issuer, 10-year bond yields rose more than 6 bps to a one-week high of around 0.46 percent. They were on track for the biggest daily jump in over five weeks.

As two-year Treasury yields hit a nine-year peak of 1.576 percent, the gap over German peers held close its widest levels in around 17 years.

A divergence in rate views in the U.S. and Europe has pushed out the gap between short-dated bond yields in the U.S. and Germany in recent days.

The spread highlights the contrast between the European Central Bank’s cautious approach to the withdrawal of extraordinary stimulus and the potential for rate hikes and a fiscal boost in the United States.

Expectations that ECB policymakers will take a cautious approach to scaling back their 2.3 trillion euro stimulus scheme when they meet next week had pushed most high-rated euro zone yields lower over the past week.

The central bank is likely to decide to ease its asset purchases while avoiding an abrupt cut in their volume, ECB policymaker Ewald Nowotny said on Friday.

Later on Friday, Moody’s is scheduled to review Spain’s sovereign rating, days after warning that political tensions between Madrid and the secessionist leadership in Catalonia were credit-negative for the sovereign.

On Thursday, Spain’s central government said it would impose direct rule on the region after its leader threatened to go ahead with a formal declaration of independence.

The Spanish government has secured opposition support for dissolving Catalonia’s parliament and holding new elections there in January in its bid to defuse the wealthy region’s push for independence.

Moody’s currently rates Spain at Baa2 with a stable outlook.

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, additional reporting by Fanny Potkin & Dhara; Editing by Catherine Evans and Ralph Boulton

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