×

UPDATE 2-German bond yields hit 3-1/2 week high on U.S. inflation data

* Euro zone bond yields dip as supply pressures ease

* Ireland sells bonds

* BoE, U.S. inflation data eyed

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Writes through)

LONDON, Sept 14 (Reuters) - Germany's 10-year bond yield hit a 3-1/2 week high on Thursday as a rise in domestic consumer prices in the United States rekindled bets of a December interest rate hike in the world's biggest economy.

Government bond yields in Germany, the bloc's biggest economy and its benchmark bond issuer, have climbed more than 13 basis points from 2-1/2 month lows hit at the end of last week.

A bond market selloff that began on Friday after a report that European Central Bank rate-setters agreed last week to start reducing bond purchases, accelerated this week as markets absorbed more than 15 billion euros of bond issuance from the bloc.

This was given added impetus on Thursday afternoon as a stronger-than-forecast increase in domestic consumer prices in the United States revived bets that the Federal Reserve would raise interest rates for a third time in 2017.

This pushed two-year U.S. Treasury yields to a seven-week peak, and German Bunds, which often move in step with other major world economies, pushed higher to 0.42 percent, up a basis point on the day.

They were also pushed higher after Bank of England policymakers said their first interest rate rise in more than a decade was likely to be needed in the "coming months" if the economy keeps growing and inflationary pressures build.

However, analysts were still focused on a string of bond sales as the main driver of yields.

"Supply may be easing today but it remains the theme of the week," said Rabobank fixed-income strategist Lyn Graham-Taylor.

Ireland sold 1 billion euros of bonds on Thursday.

That followed an unexpected 3.5 billion euro sale of 100-year bonds from Austria earlier this week.

Germany, the Netherlands and Italy have also held bond auctions as supply from the region picks up after a summer lull.

Investors often sell existing bonds to make way for new ones, putting upward pressure on bond yields.

Analysts said sentiment remained bearish.

One reason for that is a weakening euro, which could encourage the ECB to bring forward plans for a withdrawal of its massive bond-buying stimulus.

The euro has weakened about 1.6 percent from 2-1/2 year highs hit against the dollar last week.

A slight weakening in the single currency helped lift a key market gauge of long-term euro zone inflation expectations to a four-month high at 1.63 percent.

"The weaker euro has amplified the headwinds facing the bond market," said Rainer Guntermann, a strategist at Commerzbank. "With the euro off its highs, it is easier for the ECB to taper next year."

With the threat of euro zone deflation largely gone, the justification for the European Central Bank's massive asset purchase scheme is no longer there and policymakers should ease up on stimulus, Bundesbank President Jens Weidmann said on Thursday.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Reporting by Dhara Ranasinghe; Editing by Matthew Mpoke Bigg and Hugh Lawson)