By Alun John
LONDON, Feb 15 (Reuters) - European bond yields on Wednesday held just shy of multi-week highs hit a day earlier when European fixed income was caught up in the spillover from U.S. inflation data that caused markets to position for more Federal Reserve rate rises.
While lower-than-expected British inflation figures sent UK yields down sharply, expectations that central banks around the world will keep raising rates and may have to keep them elevated for some time continue to pressure sovereign bonds.
Germany's 10-year bond yield, the benchmark for the euro zone, dipped 2 basis points (bps) to 2.42%, having hit a six-week high of 2.447% on Tuesday.
The German two-year yield also dipped 2 bps to 2.84%, down from the previous day's more than 14-year high.
"Terminal central bank policy rates keep repricing higher which is pushing up bond yields across the curve, said Kenneth Broux, senior strategist FX and rates at Societe Generale.
"Inflation is not cooling fast enough in the U.S. and the euro area, and while the UK was welcome this morning - i.e. core lowest since June - it is still elevated and the labour market is tight."
Market pricing is now for U.S. rates to peak at 5.25% and remain above 5% throughout this year, and for European Central Bank (ECB) rates to top out at 3.55% in the autumn.
This implies that central banks still have more rate-raising work ahead of them. The ECB raised its main interest rate by 50 bps to 2.5% earlier this month and the Fed raised its benchmark by 25 bps to 4.5-4.75%.
The latest push higher for terminal rate pricing came after U.S. data on Tuesday that showed inflation was proving sticky, which after some volatility eventually sent yields in the U.S. and Europe higher.
Data released on Wednesday showed British consumer price inflation fell by more than expected to 10.1% year-on-year in January, and a measure excluding energy, food, alcohol and tobacco fell to 5.8% from December's 6.3%.
That helped British bonds to outperform peers, and 10-year gilt yield dropped 10 bps to 3.42%, down from Tuesday's over five-week high.
But that optimism was largely confined to the UK market. Italian yields, the benchmark for the euro zone periphery were in line with the broader mood, with the 10-year yield dipping 2 bps to 4.207%, and the 2-year yield falling 2 bps to 3.36%. (Reporting by Alun John Editing by Helen Popper)