UPDATE 2-German yields hit one-year high as inflation exceeds ECB target

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds German data)

LONDON, April 29 (Reuters) – German Bund yields hit their highest level since March 2020 on Thursday as inflation in Europe’s biggest economy exceeded the European Central Bank target for a second month in a row, strengthening the case for a pullback in central bank stimulus.

Germany’s annual consumer price inflation accelerated to 2.1% in April, exceeding market expectations and advancing further above the ECB’s target of “close to but below 2%”.

With the global economy on the mend, investors are on the lookout for any signs that central banks worldwide may start scaling back the extraordinary stimulus that has been flowing into the economy since the start of the COVID-19 crisis.

“While there may be temporary factors influencing inflation over the next few months, there’s no doubt in anyone’s mind we are in the beginning of the growth cycle,” said ING rates strategist Antoine Bouvet. “It’s absolutely logical for yields to keep rising.”

German 10-year bond yields rose 3.2 basis points to -0.20%, the highest it has been since March 2020.

Other euro zone government bond yields were also up 3-5 basis points.

A market gauge of long-term euro zone inflation expectations was up to 1.5417% on Thursday, up from 1.519% the day before.

The possibility of a tapering of bond purchases from the U.S. Federal Reserve had sparked a sharp selloff in the world’s major government bonds — including in the eurozone — in recent weeks and especially on Wednesday.

But investors received some reassurance from Fed Chair Jerome Powell after the conclusion of a meeting of rate-setters on Wednesday that the U.S. Federal Reserve would not imminently reduce its support of the U.S. economic recovery .

In addition, German job market data was disappointing, suggesting another setback for recovery hopes.

Even so, government yields overall have risen significantly, suggesting that growth and inflation expectations are high. Germany’s 10-year yield, for example, is up around 40 bps this year to date.

“But the direction of travel is very clear. The recovery is gaining in momentum and so is inflation,” said Bouvet.

Other countries are also due to report inflation data this week while an overall euro zone number is due out on Friday.

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