UPDATE 2-German 10-year yields rise to highest since July after Powell speech

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By Dhara Ranasinghe and Yoruk Bahceli

LONDON/AMSTERDAM, Aug 27 (Reuters) – Safe-haven 10-year German Bund yields rose to their highest since early July on Thursday after the U.S. Federal Reserve unveiled an aggressive new strategy to restore the United States to full employment and lift inflation back to healthier levels.

Under the new approach, outlined by Fed Chair Jerome Powell in a prepared speech for the virtual Jackson Hole symposium, the Fed will seek to achieve inflation averaging 2% over time, offsetting below-2% periods with higher inflation “for some time”, and to ensure employment does not fall short of its maximum level.

U.S. Treasury yields initially fell following the comments, dragging down borrowing costs in Europe, with analysts attributing the move to short-covering after a hefty amount of supply this week caused a selloff in European debt.

But in a volatile session, U.S. and European yields changed course after the speech, with Germany’s 10-year Bund yield hitting its highest since early July at -0.384%. It was last up 1 basis point at -0.40%.

Italian bond yields also reversed an earlier fall to stand unchanged at 1.09%, holding below thee-week highs hit earlier this week.

“There was little to surprise the market except perhaps from Powell saying explicitly the Fed will allow for job gains without assuming it will lead to inflation, and being more specific on the outcome of the review than he could have been,” said Antoine Bouvet, senior rates strategist at ING.

The yield curve, or gap, between bonds with two- and 10-year maturities steepened in both the U.S. and Germany , to the widest since June, but analysts sounded a cautionary note on the European move.

“European curves have no real reason to steepen up on inflation dynamics,” said Peter Chatwell, head of multi-asset strategy at Mizuho, adding that the only reason for a temporary steepening would be the amount of euro zone supply set to hit the market.

He said that if anything the Fed’s move should have the opposite effect.

“In fact what it would be doing is allowing the euro to resume its appreciation path, which would be disinflationary for Europe.”

Meanwhile, the European Central Bank cannot accept further delays in inflation reaching its target, so it stands ready to adjust all of its instruments as needed, ECB chief economist Philip Lane said.

A pick up in new bond issuance in the euro area has contributed to a selloff in bonds this week but supply pressures abated for the time being on Thursday. (Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli, editing by Giles Elgood, Kirsten Donovan)

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