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UPDATE 1-German yields edge lower after failing to test zero level

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

Jan 18 (Reuters) - German government bond yields edged lower on Tuesday after the 10-year failed to rise to the zero level earlier in the session, while financial markets were fretting about more hawkish moves from the Federal Reserve.

The Fed will meet next week amid officials’ recent comments that have bolstered expectations for a March policy tightening and highlighted the central bank is ready to act in the face of stubbornly high inflation.

U.S. Treasury yields jumped on Tuesday, lifting the shorter end to new pandemic highs, while the 10-year yield rose 4 basis points (bps) to 1.82% in London trade.

Analysts see a slower normalization path in the euro zone, after the massive pandemic stimulus, but also a high degree of transmission of higher yields from the United States to Europe.

Germany’s 10-year government bond yield, the benchmark of the bloc, was down 0.5 bps, after touching its highest level since May 2019 at -0.002%.

German 5-year and 2-year yields briefly hit their highest since March 2019, respectively at -0.324% and -0.553% . The 30-year yield touched its highest since June 2021 at 0.289%.

“With pressure via U.S. Treasuries resuming this morning, the market remains vulnerable, and Bunds look set to test the 0% yield before long,” Commerzbank analysts said.

“We thus prefer tactical shorts above this level,” they added in a note to clients.

But geopolitical concerns might boost demand for safe-haven assets, driving yields lower, after talks between Moscow and Western states on Russia’s deployment of troops along Ukraine’s border ended with no breakthrough.

“Tensions between Russia and Ukraine will be somewhat of a wild card over the next few weeks, although the general tone is tilted towards the heated rate hike discussion in the U.S. leading to higher yields, with the European bond universe not immune to spillover effects,” Unicredit analysts said.

Meanwhile, the Bank of Japan might have added some upward pressure on rates but analysts said the outcome of its meeting was uneventful or more dovish than expected.

The BOJ raised its inflation forecasts on Tuesday but said it was in no rush to change its ultra-loose monetary policy, as rising prices fan speculation it may soon signal a shift in its decade-old stimulus experiment.

Bond supply was also in investors’ focus as Germany sold 3.22 billion euros of its new 5-year Bobl notes at the lowest price of 101.53, with an average yield of -0.58%.

Belgium was set to raise 5 billion euros from the sale of a new 10-year bond on the back of 21 billion euros of demand, according to a lead manager memo seen by Reuters.

Reporting by Stefano Rebaudo, additiona reporting by Yoruk Bahceli editing by and Alex Richardson

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