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UPDATE 2-Euro zone bond yields dip, recover after weak inflation data

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

MILAN, Jan 7 (Reuters) - Euro zone government bond yields fell and then recovered on Thursday as traders weighed weak inflation data against the bullish impact of a jump in Treasuries yields on expectations of more fiscal spending in the United States.

Economic sentiment in the euro zone improved as expected in December, but consumer price trends stayed in negative territory, below analysts’ consensus forecast.

U.S. Democrats on Wednesday completed a sweep of the two Senate seats up for grabs in runoff elections in Georgia, giving the party control of the chamber and boosting the prospects for President-elect Joe Biden’s legislative agenda.

Hours after hundreds of President Donald Trump’s supporters stormed the U.S. Capitol, a shaken Congress on Thursday formally certified Democrat Biden’s election victory.

Germany’s 10-year Bund yield fell to as low as -0.574% around 1120 GMT, before gradually recovering to trade flat on the day at -0.546% by 1557 GMT. The spread with U.S. yields was at 163.01 basis points, its widest since March last year.

“Regarding Bunds/outright valuations, the transatlantic spread and U.S. dollar break-evens continue to absorb the bulk of U.S. reflation dynamics,” Commerzbank analysts said.

Analysts forecast that the spread between U.S. and German yields will stay around 160 basis points in 2021 as U.S. GDP is expected to return to pre-COVID-19 levels faster than in the eurozone, while ECB’s quantitative easing has been more supportive of Bund than the Fed of Treasuries.

Italian 10-year government bond yield was down 1 basis point at 0.527%.

“In addition, spreads continue to trade with a tightening bias,” Commerzbank added.

Italy got strong orders for a syndicated bond issue, taking advantage of a solid market for euro zone borrowers as investors bet on aid from the European Central Bank and the European Union’s Recovery Fund.

A large euro zone government bond supply in January is not expected to affect bond prices.

Unicredit forecast euro zone issuers will sell around 45 billion euros this week, while supply will probably amount to roughly 150 billion euros in January.

Abundant issuance activity does not represent a “concern for investors as the ECB is likely to purchase an amount of bonds broadly in line with net supply,” a Unicredit research note said. (Reporting by Stefano Rebaudo; Additional reporting by Elizabeth Howcroft; Editing by Hugh Lawson and Philippa Fletcher)

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