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German yields rise to highest since June, focus turns to euro zone inflation

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

AMSTERDAM, Aug 28 (Reuters) - German bond yields rose to their highest since early June in early Friday trade, after the U.S. Federal Reserve’s decision to target average inflation pushed yields to multi-month highs on both sides of the Atlantic.

Fed Chairman Jerome Powell said on Thursday the central bank would now try to keep inflation at an average 2% over time, offsetting below-2% periods with higher inflation “for some time”, and to ensure employment does not fall short of its maximum level.

Attention now turns to inflation readings in the euro zone after the Fed’s decision.

French inflation on Friday came in line with expectations from a Reuters poll, rising 0.2% in August, down from 0.9% in July. German and euro zone inflation readings will follow next week.

Readings are expected to show euro zone inflation at just 0.2% August, far below the European Central Bank’s target of close to but below 2%, leading some analysts to see the rise in market inflation expectations as unsustainable. Long-term expectations are now near their highest since early February, before the coronavirus shook European markets, at over 1.25%.

“Today’s first indications for euro inflation during August from France should underscore the central banks’ challenges in reaching their inflation targets,” Commerzbank’s head of rates and credit research, Christoph Rieger, told clients.

“With this, euro break-evens at pre-crisis levels hold downside potential and we still see better value in buying Bund dips above -0.4% 10-year yields,” he said, referring to the measure of inflation expectations.

Germany’s 10-year yield rose to their highest since early June at -0.372% in early trade. They were last up 2 basis points at -0.38%.

Italy’s 10-year bond yield rose 2 basis points to its highest in nearly four weeks at 1.115% ahead of an auction.

Italy is scheduled to sell 8.25 billion euros through a new five-year bond and re-open three- and 10-year bonds. (Reporting by Yoruk Bahceli, editing by Larry King)

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