Bund gap vs US Treasuries at tightest in over 2 months, UK budget in focus

By Stefano Rebaudo

Nov 26 (Reuters) - The yield gap between U.S. and German government bonds hovered around its tightest level in more than two months on Wednesday, as traders ramped up bets on Federal Reserve rate cuts while expecting the European Central Bank to stay firmly on hold.

The spread widened sharply in early April after U.S. President Donald Trump announced tariffs on major trading partners, triggering a sharp selloff in all U.S. assets, including government bonds.

Investors await Britain's upcoming budget announcement, with finance minister Rachel Reeves expected to raise tens of billions of pounds in taxes.

Germany’s 10-year yields DE10YT=RR, the euro area’s benchmark, rose one basis point (bp) to 2.68%.

Benchmark 10-year U.S. Treasuries yields US10YT=RR were up one basis point to 4.01% after falling for a fourth straight session the day before when data reinforced expectations the Federal Reserve will cut interest rates next month. nL6N3X111O

Yields on 10-year UK gilts GB10YT=RR fell 4.5 bps to 4.49%.

The spread between U.S. Treasuries and Bunds DE10US10=RR was at 132.50 bps. It hit 132.16 on September 17, its lowest since early April.

Traders priced in around a 40% chance of an ECB 25-basis-point rate cut by September EURESTECBM7X8=ICAP while expecting the key rate to be at 1.95% in March 2027 from the current 2%.

Germany’s 2-year yields DE2YT=RR, more sensitive to expectations for ECB policy rate outlook, rose 0.5 bps to 2.02%. It hit 2.051% last week, its highest level since March 28.

Italy’s 10-year government bond yield IT10YT=RR was up one bp at 3.41%.