LONDON, Jan 4 (Reuters) - Euro zone bond yields fell in early trade on Wednesday with the market taking a nuanced view on inflation ahead of euro zone consumer prices data due out later in the session.
A surprisingly high inflation print from Germany pushed yields sharply higher on Tuesday as the country's Ifo economic institute called on the European Central Bank to end its bond buying if the data was replicated across the euro zone.
Inflation numbers for the single currency bloc are due out at 1000 GMT, and while expectations are that they will overshoot, analysts believe the increase region-wide will be less dramatic than in Germany.
A Reuters poll predicted a 1 percent year-on-year rise in December compared to 0.6 percent the previous month. German prices, harmonised to compare with other European countries, rose 1.7 percent compared to expectations of 1.3 percent.
"Euro zone inflation will probably be biased towards a higher rate, but it won't be bursting the market," said DZ Bank analyst Rene Albrecht. "In any case, much of the increase in headline inflation is related to the oil prices. We don't expect the core inflation rate to pick up as much."
Oil prices have risen steadily over the past year. Brent crude was at $56.11 per barrel at 0845 GMT on Thursday, compared with $37.18 a year ago.
ING strategists suggested the high German inflation print was merely the trigger for a much needed correction given that German government bond yields dropped as much as 17 bps in the second half of December.
"Important will be the core (euro zone) figure and whether it will also nudge higher from the 0.8 percent level where it has been for four straight months," the strategists said in a note.
Most euro zone bond yields fell 1-3 basis points in early trades. Germany's 10-year bond, the region's benchmark, saw its yield drop 2 bps to 0.26 percent by 0815 GMT.
A key measure of long-term euro zone inflation expectations, the five-year five-year forward rate, rose further on Wednesday to 1.77 percent, its highest level in over a year.
The European Central Bank targets core inflation of just below 2 percent for the single currency bloc.
Euro zone government bond yields are also expected to be affected by upcoming bond issuance, as January is traditionally a busy month for government borrowers.
On Tuesday the yield on Ireland's 10-year bond rose 11 bps to 0.89 percent ahead of a planned sale of 20-year bonds via syndication on Wednesday.
Rumours of a new syndicated sale of bonds by Portugal pushed that country's 10-year bond yield up 20 bps on Tuesday. The yield shed 5 bps of that gain to 3.89 percent by 0835 GMT on Wednesday.
For Reuters new 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 John Stonestreet)