REFILE-UPDATE 3-German bond yields slip after U.S. inflation data

(Corrects to Update 3 in headline, no changes to text)

Aug 11 (Reuters) – Benchmark German bond yields dipped from near two-week highs on Wednesday after U.S. inflation data gave no extra fuel to speculation over when the Fed might taper its bond buying.

The figures showed U.S. consumer price increases slowed as forecast, although annual inflation overall remained historically high at 5.4% amid supply-chain disruptions linked to a swift rebound in economic activity.

“The market had just teed itself up for a bigger number than consensus, which would have fit the narrative from the Fed speakers we’ve had over the last week or so,” Lyn Graham-Taylor, rates strategist at Rabobank, said of the post-data yield dip.

The data followed comments by two U.S. Federal Reserve officials that inflation was already at levels that satisfy one part of a key test for starting to wind down bond buying.

Fed rate-setters’ comments and better-than-expected U.S. jobs data on Aug. 6 halted a sharp yield fall in July and early August in both the United States and the euro area.

Following the data, Germany’s 10-year yield, the benchmark for the euro area, first dipped and at 1512 GMT was almost unchanged at -0.458%. Earlier it had touched the highest since July 29 at -0.435%.

Still, the gap between 10-year German and U.S. Treasury yields widened to 182 bps on Wednesday before the data, the largest since June, as German bonds continued to outperform U.S. Treasuries.

The diverging outlook of the European Central Bank from the Fed, especially after a revision of its inflation target will mean it keeps rates lower for longer, has supported euro area government bonds.

Inflation-adjusted “real” yields, often monitored as a gauge of expected financial conditions, have also risen from record lows in the euro area after driving July’s bond rally.

But the rise has lagged that of U.S. yields and they have fallen since the start of the week.

“We expect USD rates will rise much faster from here. With Fed tapering coming into view, the divergence with ECB (quantitative easing) policy will become more obvious,” ING analysts told clients.

A market gauge of long-term euro zone inflation expectations rose to the highest since July 30 above 1.69%

Southern European bonds underperformed on Wednesday and Italian bond yields were 2 basis points higher after rising to the highest since Aug. 3 at 0.599%.

That pushed the closely watched spread with German 10-year yields to 103 bps, a move analysts attributed to profit taking after the spread fell below 100 bps for the first time since July 14 on Tuesday.

In the primary market, Germany raised 3.316 billion euros from the re-opening of a 10-year bond at auction, the bloc’s only auction this week.

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