UPDATE 2-Euro zone bond yields tick up after inflation surprise

(Adds Greek bond mandate, chart)

Aug 31 (Reuters) – Euro zone bond yields rose on Tuesday after the bloc’s August inflation reading came in far above expectations.

First-estimate data showed inflation increased to 3% year-on-year in August, the highest in a decade, far above the European Central Bank’s 2% target and a 2.7% forecast by a Reuters poll.

Core inflation, a narrower reading that strips out volatile food and energy costs, also surged to 1.6%, compared to expectations for a rise to 1.4%.

Though bond markets are closely focused on inflation readings this year, price action following the data was marginal.

By 1011 GMT, Germany’s 10-year yield, the benchmark for the euro area, was up 2 basis points to -0.42%, but still kept below last week’s one-month high at -0.401%.

Italy’s 10-year yield was up 3 bps to 0.64%, keeping the closely watched gap with German 10-year yields at 105 bps.

Inflation came in above the European Central Bank’s target for the second month in a row and is expected to shoot up further in the remainder of this year. But this is largely seen as a temporary increase driven by transitory factors and policymakers argue that it will languish well below the bank’s target for years to come.

Ludovic Colin, portfolio manager at Vontobel Asset Management, said the European Central Bank’s new symmetric 2% inflation target, which allows for temporary overshoots, was keeping markets calm.

“The market is saying we might see 2% (inflation) but we’ll never see 2% average over an extended period of time in Europe,” he said.

“That’s why, even if you’ve got strong inflation numbers in Europe, the chance that it precipitates a massive yield rise in Europe is very low.”

Data earlier on Tuesday had already showed French inflation came in higher than expected at 2.4% year-on-year, while Spanish inflation also exceeded expectations on Monday.

On Monday, data showing German inflation at a 13-year high, in line with expectations, failed to trigger price action.

In the primary market, issuance picks up this week following the summer lull. Commerzbank expects 29.5 billion euros of issuance in the busiest week since mid-July, though coupon payments and redemptions will more than offset the supply.

On Tuesday, Italy raised 7.75 billion euros from the re-opening of five and 10-year bonds, alongside a seven-year floating-rate bond, with the five-year issued at a record low yield of -0.01%.

The Netherlands was set to raise up to 2.5 billion euros from the re-opening of a four-year bond.

Greece hired a syndicate of banks to re-open a five and a 30-year bond. The sale is “expected in the near future,” a phrase debt management offices usually use a day before a sale.

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