* Euro zone inflation hits 2 pct in Feb
* Bund yields at highest in just over a week
* Talk of March U.S. rate hike weighs on market
* French bonds outperform, spread vs German tightens
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
(Updates prices, adds move in France)
By Dhara Ranasinghe and John Geddie
LONDON, March 2 Germany's benchmark 10-year bond
yield rose to its highest level in just over a week on Thursday
after inflation in the bloc hit 2 percent for the first time in
four years last month, shooting past the European Central Bank's
With the exception of France, bond yields across the euro
area edged higher, buttressed by expectations that the U.S.
Federal Reserve will raise interest rates later this
Inflation in the 19-member euro area rose to 2 percent last
month, from 1.8 percent in January, increasing pressure on the
ECB, which targets inflation of below but close to 2 percent, to
end loose monetary policy.
Analysts said a pick-up in headline inflation had been
expected after strong country data in recent days, limiting a
bigger selloff in bond markets for now. German inflation soared
to its highest level in four-and-a-half years in February, data
on Wednesday showed.
Also, an underlying measure of euro zone inflation held
steady at 0.9 percent last month, suggesting that once the oil
price surge passes through the numbers, inflation will fall
Still, the overall pick-up in inflation does not bode well
for bond markets and is seen fuelling talk of a scaling back in
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.
"Psychologically, 2 percent inflation could be important and
there will be more pressure building on the ECB to taper,
especially if the economy continues to grow," said KBC
strategist Piet Lammens.
The ECB is scheduled to meet next on March 9.
German 10-year bond yields rose 4 basis points to 0.32
percent, 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
U.S. two-year Treasury yields hit their highest level in
more than 7-1/2 years on Thursday on increasing expectations of
a Fed rate hike this month.
In contrast, sentiment towards battered French bonds
improved further, narrowing the gap between 10-year yields in
France and Germany to a fresh one-month low around 58 bps.
French presidential election frontrunner Emmanuel Macron on
Thursday unveiled his manifesto, saying he would root out
inequalities in France's pension system, sell government stakes
in major firms and downsize parliament.
Macron, a former investment banker running as an independent
centrist, is favourite to win the unpredictable race in a May
run-off against far-right leader Marine Le Pen.
"Any significant candidate, whether that's Macron or
(Francois) Fillon, that highlights they have a plan is likely to
be viewed as positive by markets," said Rabobank strategist Matt
"This not only reduces the chance of a Le Pen victory but
outlining a concrete plan for the economy defuses the market
sensitivity to fragmentation risk in the euro zone that is
implied by a Le Pen victory."
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 Alison Williams)