August 30, 2017 / 10:46 AM / 3 months ago

UPDATE 2-Inflation gains steal bond investors' gaze from Korea

* Spain inflation data beats forecast

* Regional data points to solid upswing in Germany

* Analysts say economy in focus as Korea nerves subside

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds data)

By John Geddie

LONDON, Aug 30 (Reuters) - Euro zone government bond yields rose on Wednesday following forecast-beating inflation numbers from Spain and Germany, defying the euro’s recent strength.

Analysts said attention switched to the bloc’s economic health as the initial shock about North Korea’s firing a missile over Japan abated.

Gains of nearly 14 percent for the euro against the dollar this year should have held down prices in the bloc as imports become cheaper.

But data on Wednesday showed Spanish inflation rose 2 percent year-on-year in August, beating economists’ forecasts of 1.8 percent and last month’s reading of 1.7 percent.

German consumer prices, harmonised to compare with other European countries, rose by 1.8 percent on the year after an inflation rate of 1.5 percent in the previous month. This was the strongest rate since April and followed strong regional data earlier in the day.

“We are very much in a situation where, with the euro rising, investors are expecting inflation pressures to soften in the coming months,” Mizuho strategist Antoine Bouvet said.

“So higher inflation data goes counter to the markets’ expectations and you would expect more of a reaction as it would be more of a worry to investors.”

Data on Thursday is expected to show euro zone inflation at 1.4 percent in August, up from 1.3 percent previously. That is still well below the European Central Bank’s near 2 percent target, but the upward trend will be some comfort for policymakers looking to rein in their monetary stimulus.

On top of that, euro zone economic sentiment hit a new 10-year high on Wednesday, rising for a fourth consecutive month in August.

Strong U.S. economic numbers added to upward pressure on U.S. and European bond markets. The U.S. economy grew at a 3 percent annual rate in the April-June quarter - the strongest since the first three months of 2015, data showed.

German 10-year bond yields, the bloc’s benchmark, rose around 3 basis points to 0.37 percent, climbing off a two-month low of 0.34 percent hit Tuesday. It was set for its biggest daily rise in over two weeks.

Most other euro zone yields were 1-2 bps higher on the day, reversing some of Tuesday’s slide. Yields rise as prices fall.

A key market measure of long-term euro zone inflation - the five-year, five-year breakeven forward rate - rose to 1.60 percent, its highest level in almost two weeks.

Analysts said a measured response from the United States to North Korea’s ballistic missile test early on Tuesday had also helped ease a rush into bonds, which are seen by investors as a safer store of cash than equities in times of crisis.

Debt sales by Finland and Italy and an exchange from Portugal were also seen adding upward pressure to yields on Wednesday as investors sold their outstanding bonds to make room for the new supply.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Additional reporting by Dhara Ranasinghe; Reporting by John Geddie; Editing by Mark Heinrich

Our Standards:The Thomson Reuters Trust Principles.
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