February 28, 2019 / 10:57 AM / 5 months ago

UPDATE 2-Inflation data pushes German bond yields to new 3-week highs

* Spanish, Italian inflation ticks higher

* German inflation meets expectations, French CPI weaker than expected

* German Bund yields hit 3-week highs

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds German inflation data)

By Dhara Ranasinghe

LONDON, Feb 28 (Reuters) - German 10-year government bond yields edged closer to 20 basis points on Thursday, hitting new three-week highs after data from the euro zone’s biggest economies suggested a pick up in inflation.

Having fallen to more than two-year lows below 0.10 percent earlier this month, German bond yields rose sharply on Wednesday as receding fears of a no-deal Brexit sparked a sell-off in British Gilts that spilled over into other safe-haven bond markets.

While German annual inflation was in line with expectations, rising 1.7 percent year-on-year, and French inflation picked up less than expected, Spanish and Italian consumer prices accelerated in February.

Spanish consumer price inflation rose by 1.1 percent year-on-year, lifting for the first time since September as fuel costs increased, while annual inflation in Italy accelerated to 1.2 percent from 0.9 percent in January. [nL5N20N300 ]

“It’s the inflation numbers this morning and overall the news on Brexit that has allowed some profit-taking on Bunds after what has been a pretty persistent rally,” said John Davies, G10 rates strategist at Standard Chartered Bank.

The sell-off in German bonds gathered momentum in the European afternoon after data showed the U.S. economy slowed less than expected in the fourth quarter amid solid consumer and business spending.

U.S. GDP increased at a 2.6 percent annualised rate in the fourth quarter after expanding at a 3.4 percent pace in the July-September period.

Bund yields tracked 10-year U.S. Treasury yields, which were last up three basis points on the day at 2.72 percent .

Bund yields touched 0.195 percent, close to the 0.20 percent threshold last crossed on February 5. They had been down as much as 1.5 bps at 0.14 percent earlier in the session following the French inflation numbers.

The German yield curve steepened, with the gap between two and 10-year bond yields at its widest in around two weeks at 71 basis points.

“It was quite striking yesterday that the selloff in Gilts dragged on the German and U.S. bond markets,” said KBC rates strategist Mathias van der Jeugt.

A flash estimate of euro zone inflation data is due out on Friday.

Global trade tensions and an early end to a U.S.-North Korean summit in Hanoi weighed on global stock markets, limiting the rise in safe-haven bond yields.

Reporting by Dhara Ranasinghe and Virginia Furness; Editing by Jon Boyle/Andrew Heavens/Kirsten Donovan

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