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UPDATE 2-Long-dated German yields rise to highest in a year, tracking U.S. Treasuries

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, updates prices)

LONDON, March 18 (Reuters) - Germany’s 30-year yield rose to its highest in more than a year on Thursday, tracking U.S. Treasuries as markets focused on uncertainty about the outlook for inflation.

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

Although the bond market reaction after the Fed’s press conference was mixed, U.S. yields picked up as European markets opened.

The 10-year Treasury yield rose above 1.74% for the first time since January 2020. Market participants were uncertain 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 bond yield rose to a 20-day high of -0.249% in earlier trade and was up 2 basis points at -0.269% at 1544 GMT..

Longer-dated bond yields rose more, with the German 30-year yield reaching its highest since January 2020 at 0.311% earlier in the session..

That steepened the German yield curve as measured by the gap between 10 and 30-year yields to its most since September 2019 at 56 basis points.

But with German bonds still outperforming U.S. Treasuries thanks to a weaker economic outlook and renewed European Central Bank support, the gap between U.S. and German 10-year yields widened to 200 basis points for the first time since February 2020.

Commerzbank rates strategists said n a note that smaller moves on German bonds were of little comfort. They added that the rise in yields “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”.

ECB 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.

Despite the bond-market sell-off, Italian 10-year yields slipped 1 basis point on the day to 0.69%, pushing the closely-watched risk premium over German equivalents down to 95 basis points.

Reporting by Elizabeth Howcroft and Yoruk Bahceli; Editing by Elaine Hardcastle and Emelia Sithole-Matarise

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