March 2, 2017 / 8:17 AM / 6 months ago

Inflation rebound hopes prop up euro zone bond yields

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By John Geddie

LONDON, March 2 (Reuters) - Euro zone government bond yields edged up on Thursday ahead of data expected to show the fastest rise in euro area consumer prices in over four years.

Europe's benchmark German 10-year yield hit a 10-day high, buttressed by expectations that the U.S. Federal Reserve is set to raise interest rates later this month. Governor Lael Brainard joined the chorus of policymakers signalling a hike may come as soon as mid-March late on Wednesday.

But the main event in the euro zone on Thursday was flash inflation for February due at 1000 GMT.

Economists polled by Reuters predict annualised price growth of 2 percent, while some analysts expect an even higher figure in what is set to be the first reading in line with the ECB's medium-term target since January 2013.

The highest print of German inflation in four-and-a-half years on Wednesday has already triggered fresh calls from the bloc's biggest economy for the ECB, which targets inflation of below but close to 2 percent, to end loose monetary policy.

The ECB is scheduled to run its quantitative easing bond-buying scheme until at least December and has pushed interest rates deep into negative territory to try to stimulate weak growth and hitherto stubbornly low inflation.

"Today's Eurozone CPI data will likely show that the headline inflation rate breached 2 percent for the first time in four years – which could extend bearish momentum (in bonds)," ING's global head of debt and rates strategy Padhraic Garvey said.

Strategists said lower core inflation, a measure that excludes the effect of sharply rebounding energy prices over the last year, could temper the market reaction because it would signal that consumer price growth may not be durable over time.

The ECB is scheduled to meet in a week's time on March 9.

German 10-year yields rose 2 basis points to 0.30 percent on Thursday, adding to Wednesday's 4 bps rise seen after policymakers suggested the Fed was worried about waiting too long to raise rates in the face of looming economic stimulus from Washington.

Further comments from Brainard, a key voice throughout 2015 and 2016 in warning that trouble in Europe and slower-than-expected growth in China could hurt the United States, an argument that helped slow the Fed's expected pace of tightening, has served to firm expectations for a hike.

Most other euro zone yields were up slightly on the day.

Analysts said bond auctions on Thursday from Germany and Spain should also keep upward pressure on yields as investors tend to sell existing bonds ahead of debt sales to make room in their portfolios for the new supply.

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

Editing by Hugh Lawson

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