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Euro zone government bonds yields rise, tracking U.S. Treasuries

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

LONDON, March 18 (Reuters) - Euro zone government bond yields rose in early London trading on Thursday, tracking upward moves in U.S. Treasuries, as markets focused on uncertainty about the outlook for inflation.

The U.S. Federal Reserve said it expected higher economic growth and inflation in the U.S. this year and repeated its pledge to keep its target interest rate near zero.

U.S. yields picked up as European markets opened, with the 10-year Treasury yield rising above 1.74% for the first time since January 2020, amid uncertainty about the impact of the Fed’s new framework of allowing inflation to overshoot.

“We have this uncertainty as to what is the outlook for inflation, if the Fed is going to sit idly by, should we be concerned that a pick-up in inflation now may actually morph into something more sustained?” said Richard McGuire, rates strategist at Rabobank.

“A very significant amount of the rise in long-dated yields that we have seen through the recent sell-off is term premium - it’s uncertainty,” he said.

Europe’s government bond yields also rose, tracking the pick-up in U.S. yields but to a lesser extent.

Germany’s benchmark 10-year government bond yield was at a 20-day high of -0.269% at 0836 GMT, up around 2 bps on the day . Italy’s 10-year yield was up around 1 basis point at 0.711%.

The long end of the curve rose more, with the German 30-year yield reaching its highest since January 2020.

European Central Bank President Christine Lagarde said that the central bank will not respond to temporary blips in inflation and will prevent a rise in yields if they get ahead of the economic recovery.

Rabobank’s McGuire said that the ECB was a “passenger” in the reflation story, because Europe does not have the fiscal stimulus that is being delivered in the U.S. or the UK’s pace of vaccine rollout to justify a move higher in yields.

“In an environment of rising yields, of rising rates, then Europe is always likely to lag the U.S. and the UK,” he said, adding that that is why the ECB is more dovish than the Bank of England and the Fed.

Commerzbank rates strategists wrote in a note to clients that the latest outperformance of Bunds versus U.S. Treasuries “confirm our suspicions that although Bunds are able to cope with domestic reflation, the ECB will not be able to immunize euro rates against the expected further pressure on the term premium from the U.S. long-end.”

In Europe, the focus is on the Bank of England meeting later in the session.

Reporting by Elizabeth Howcroft

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