By Min Zeng

Investors pushed up government bonds in both the U.S. and Europe while sending the dollar higher against the euro Friday, ahead of a week that could further reinforce the diverging paths of the U.S. and eurozone economies.

The yield on the two-year German government bond fell to a record low below zero and the 10-year German yield declined to a one-month low. Lower yields drove buyers into U.S. bonds, sending the yield on the benchmark 10-year Treasury note to the lowest level in more than three weeks. Bond yields fall when price rise.

The dollar strengthened against the euro and approached a seven-month high. The U.S. currency climbed to the strongest level against the Swiss franc since 2010, and gained against many other currencies such as the British pound, the Chinese yuan, the Japanese yen, and the Canadian dollar.

A growing number of investors are betting that the European Central Bank will expand its stimulus measures when officials meet Thursday. The eurozone economy has been struggling with slowing growth and weak inflation.

Meanwhile, a reading on the U.S. jobs market on Friday is expected to show continued strength in the U.S., paving the way for the Federal Reserve in December to lift benchmark short-term interest rates from near-zero levels for the first time since 2006.

Financial-market wagers exploiting the discrepancy in interest-rate policy have been gathering momentum over the past month. In their respective policy meetings in October, ECB officials signaled that the door is open for more stimulus, while Fed officials signaled a rate increase before the end of the year is on the table.

Investors have scooped up government bonds in the eurozone, betting that fresh actions from the ECB would boost bond prices and send yields lower. At the same time, many lightened up on U.S. government debt holdings as they are concerned tightening policy would shrink the value of outstanding bonds.

But the recent rise in U.S. bond yields has turned them into attractive bargains relative to their peers in the developed world. The buying interest has helped keep a lid on the rise in long-term U.S. government bonds.

The yield on the benchmark 10-year U.S. Treasury note settled at 2.222% at 2 p.m. ET Friday in a shortened trading session after Thanksgiving, compared with 2.232% Wednesday.

"It is highly probable that the ECB will announce new stimulus measures at its forthcoming meeting," said Tony Crescenzi, senior market strategist at Pacific Investment Management Co. in Newport Beach, Calif., which had $1.47 trillion in assets under management at the end of September.

"Low global yields continue to place downward pressure on U.S. yields, which are high relative to much of the developed world," Mr. Crescenzi added.

The 10-year Treasury yield had traded above 2.3% earlier this month. It remains very low from a historical standpoint and is only slightly higher than 2.173% at the end of last year.

The stubbornly low U.S. long-term bond yields reflect investors' caution against a sharp rise amid sluggish global demand, subdued inflation, aging population, falling productivity and still highly accommodative monetary policy around the world.

Still, many money managers don't expect the U.S. 10-year yield to fall significantly from here either. The yield briefly dipped below 2% on several occasions earlier this year but failing to sustain that.

Investors say the pending shift by the Fed into tightening means many don't see much room for the yields to fall. Besides, many foreign central banks such as China's have been selling Treasury debt to raise cash to support local currencies or domestic growth.

John Canavan, market analyst at Stone and McCarthy Research Associates in Princeton, N.J., said the 10-year Treasury yield would only tumble sharply if the U.S. economy slips into a recession or the U.S. stock markets suffer a large selloff.

Few expect the U.S. economy to contract any time soon. Economists expect next Friday's data to show the U.S. economy added 205,000 new jobs last month and the unemployment rate to tumble sharply. In recent months, there have been some signs that wage inflation has picked up momentum.

The prospect of higher interest rates in the U.S. and lower interest rates in the eurozone has energized investors to pile into bets on further gains in the dollar.

One euro bought $1.0597, down 0.1% Friday. The euro has been down more than 10% against the dollar this year.

Analysts say the ECB next week could cut some deposit rates deeper below zero and expand its bond-buying program that started in March.

But some money managers caution that markets could be in for whiplash if the ECB underwhelms. Even if the ECB does deliver what investors expect, some might rush to book profits from currency and bond wagers.

Mark Dowding, senior fixed-income manager at BlueBay Asset Management, which oversees $60 billions under management, said he cashed out of his bearish bets on the euro against the dollar during the past week.

"The euro trade is very crowded trade," said Mr. Dowding. Markets already have largely priced in the implications of diverging interest-rate policies between the U.S. and Europe, he added.

 
   COUPON  ISSUE   PRICE      CHANGE   YIELD     CHANGE 
 
   7/8%    2-year  99 29/32   up 1/32   0.922%    -0.8BP 
   1 1/4%  3-year  100 3/32   up 1/32   1.218%    -1.6BP 
   1 3/8%  5-year  99 29/32   up 3/32   1.646%    -1.8BP 
   1 7/8%  7-year  100 2/32   up 3/32   1.990%    -1.3BP 
   2 1/4% 10-year  100 8/32   up 3/32   2.222%    -1.0BP 
   3%     30-year  100 1/32   dn 1/32   2.998%    +0.3BP 
 

2-10-Yr Yield Spread: +130.0BPS +129.8BPS

Source: Tradeweb/WSJ Market Data Group

--James Ramage contributed to this report.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

November 27, 2015 15:48 ET (20:48 GMT)