UPDATE 1-German bond yields edge lower, tracking U.S. Treasuries

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

MILAN, Sept 15 (Reuters) – German bond yields edged lower on Wednesday, tracking a move in U.S. Treasuries after falling the day before on weaker-than-expected U.S. inflation data.

CPI numbers suggested the Federal Reserve might be more dovish at next week’s policy meeting. The U.S. central bank was getting ready to reduce its bond-buying programme while deciding how soon to lift interest rates from near zero.

U.S. borrowing costs fell in London trade, with the 10-year Treasury yield down 0.5 basis points at 1.27%, after falling more than 6 bps on Tuesday as data showed consumer prices increased at their slowest pace in 6 months.

“At present, this slight deceleration in consumer prices, combined with the subdued improvement in the U.S. labour market and participation rate, supports the Fed’s prevailing patient stance,” Raymond James European Strategists said.

Germany’s 10-year government bond yield fell 0.5 basis points to -0.345%

“The outperformance of U.S. Treasuries, which has taken 30y spreads over Bunds to the lowest level this year, underscores the U.S. impulses are more relevant for the market direction ahead of next week’s FOMC meeting,” Commerzbank analysts said.

Meanwhile, euro zone break-evens cooled off a bit with a key market gauge of euro zone inflation expectations at 1.7282% , after hitting its highest level since mid-2015 at 1.8207% on Monday, in a sign that investor perceptions over the direction of future inflation are shifting.

“With the subdued data tone unlikely to reverse quickly with supply chain constraints lingering while demand impulses are fading, we suggest trading the range just below -0.3% in 10y Bund yields,” they added.

Data showing that euro zone industrial production was stronger than expected in July did not trigger any price action on government bonds.

“We see euro zone yields range-bound before the ECB’s December policy meeting with the central bank dovish stance offsetting rising inflation expectations,” Lauréline Renaud-Chatelain, fixed income strategist at Pictet Wealth Management, said. “We believe that just a big surprise in inflation data can change this scenario.”

“Besides, we don’t expect much price action on government bonds ahead of the German elections,” she added.

Germany’s federal election is too close to call as the number of still undecided voters hit a record high.

Some analysts forecast a more expansionary fiscal policy in Germany and Europe if, as expected, the Greens form part of the new government.

The ECB’s Pablo Hernandez de Cos reiterated the inflation increase in the euro zone is mainly temporary.

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