UPDATE 1-German Bund yields at highest in almost two weeks, dragged up by Treasuries

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates throughout, adds chart, quote, German issuance news)

LONDON, March 30 (Reuters) – Germany’s benchmark 10-year bond yield rose to its highest level in almost two weeks on Tuesday, pushed higher again by rising U.S. Treasury yields on expectations for a swift and strong U.S. economic recovery.

The latest U.S. bond selloff was driven by news on Monday that those aged 30 and older would now be eligible for coronavirus vaccinations and expectations that President Joe Biden’s infrastructure initiative, with a potential $3 trillion price tag, could further lift economic growth and debt issuance.

A rally in European shares to near record highs and signs of a pick-up in inflation in big euro zone economies also weighed on euro area bonds, pushing 10-year yields up 4 to 5 basis points across the board.

But it was the push of U.S. Treasury yields that was perhaps strongest, with 10-year Treasury yields rising to 14-month highs near 1.78%.

In turn, Germany’s 10-year bond yield rose over 5 bps to -0.26%, its highest level in almost two weeks. This left the gap with its U.S. peers at just over 200 bps and near the widest levels in over a year.

“Fixed income investors are more worried about rising inflation expectations despite last week’s PCE miss,” said Saxo Bank’s chief investment officer, Steen Jakobsen, referring to a tepid rise last week in the U.S. February personal consumption expenditures (PCE) price index.

“More Covid-19 stimulus is coming in April as well as a large infrastructure bill, which can only ignite inflation.”

Euro area yields had fallen in the past week as the European Central Bank stepped up bond purchases and tighter restrictions to contain COVID-19 renewed concern about the euro zone growth outlook.

But that move appears to have proved short-lived as a selloff in world markets resumed, with 10-year yields in Britain and Switzerland also rising.

Data pointing to a pick-up in price pressures in the euro area also weighed on euro zone bond markets.

Spanish EU-harmonised consumer prices rose by 1.2% year-on-year in March, flash data showed on Tuesday, versus a 0.9% price increase expected by a Reuters poll.

German states also started releasing March inflation numbers before a nationwide release later in the day. Inflation in the German state of Baden-Wuerttemberg, for instance, rose 1.9% from a year earlier, versus a 1.4% rise in February.

A key gauge of euro zone inflation expectations, the five-year, five-year breakeven inflation forward, rose to 1.55% , its highest since early 2019.

Elsewhere, Germany’s debt management office said Germany plans to issue 2.5 billion euros ($2.9 billion) more debt in the second quarter than originally planned to fund spending to tackle the coronavirus pandemic that has battered the economy.

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