* Yields edge lower, reversing “Trumpflation” sell-off
* Spain in focus as illegal Catalonia referendum looms
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, Sept 29 (Reuters) - Investors headed back towards euro zone bonds on Friday after lower-than-expected German inflation led many to speculate that the corresponding figure for the bloc as a whole, due out today, will also disappoint.
Euro zone bond yields fell on Friday, reversing a sharp sell-off on Thursday inspired by U.S. President Donald Trump’s tax cut plan, which saw many investors shed the world’s best-rated bonds.
Expectations of a fiscal boost in the world’s largest economy had pushed up U.S. Treasury yields. German bond yields, which often move in step with the debt of other major economies, hit eight-week highs on Thursday.
But German consumer price numbers curbed the move, with inflation at 1.8 percent remaining below expectations and below the European Central Bank’s target.
“We saw yesterday that the German HICP number was below expectations, this caused the yields to stop a further rise,” said DZ Bank strategist Sebastian Fellechner.
“Which is why euro zone inflation will be important. I can imagine that inflation would be released a tad lower as a result of the German data.”
Consumer price data for the bloc as a whole is due at 0900 GMT.
German government bond yields were roughly unchanged at 0.48 percent, and well off Thursday’s highs of 0.518 percent.
The gap between U.S. and German 10-year borrowing costs widened a touch to 184 basis points, its highest since early July, showing that growth and inflation expectations for the U.S. are more positive than for the euro zone for the time being.
Investors will be keeping a close eye on developments in the Spanish region of Catalonia, where an illegal independence referendum vote is scheduled to go ahead this Sunday.
“At the moment, there is no significant market impact from the tensions, but if the Catalan police and the Spanish police are standing there in front of the polling stations and discussing whether to block the station or not, this will be an issue,” said Fellechner of DZ Bank.
While Spanish government bonds have been relatively unaffected by the tensions, Catalonia’s own bonds showed signs of coming under some pressure leading up to the vote.
The gap between Catalonia’s outstanding bonds maturing in February 2020 and the Spanish equivalent was close to its widest level all year, at 300 basis points.
At the very least, the developments have taken attention off a scheduled ratings review for Spain from S&P Global.
“We think an upgrade at this stage looks premature with the Catalans still pushing for the independence referendum on Sunday despite the central government’s heavy-handed intervention,” analysts at ING said in a note.
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Reporting by Abhinav Ramnarayan; editing by Andrew Roche