UPDATE 2-'Reflation' trade pushes German Bund yields to 8-month highs

* German 10-year yields hit highest since June

* U.S. 10yr Treasury yields top 1.25%

* Over 100 bln euros demand for Italy bond sale

* Ultra long euro zone debt under-performs in selloff

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

LONDON, Feb 16 (Reuters) – German 10-year bond yields hit their highest level since June on Tuesday as expectations for an economic recovery and extraordinary fiscal stimulus in the United States pushed yields higher across the board.

U.S. President Joe Biden will travel to Wisconsin on Tuesday to press his case for a $1.9 trillion pandemic relief bill in the political battleground state that helped secure his victory in last year’s presidential election.

Prospects of reflation – a boost in inflation from extraordinary fiscal stimulus – pushed U.S. Treasury yields above 1.25% for the first time in 11 months on Tuesday.

This had a corresponding effect on euro zone bond yields.

“The economic optimism is being driven by a significant fall in COVID-19 cases in the U.S. and the UK and the export of the reflation trade from the U.S,” said ING rates strategist Antoine Bouvet. “It is not justified by economics in the euro zone. It’s a purely financial and market-driven move.”

German 10-year yields hit their highest level since June last year, rising three basis points to -0.353%.

Most other high-grade euro zone government bond yields also rose between 2-4 basis points.

Even in this environment of rising rates, Italy drew record demand with a two-part bond sale on Tuesday, riding investor enthusiasm at the appointment of former European Central Bank chief Mario Draghi as prime minister.

“We consider the Italian treasury’s decision to syndicate the new 10-year a sign that they are looking to get out as much supply as possible while favourable conditions persist, cashing in on the fundamentally improved Italian political outlook,” Mizuho analysts said.

Italian yields have dropped sharply this year after it became apparent that the former European Central Bank chief would take on the premiership of the country.

Elsewhere, recently issued “ultra long” euro zone debt has suffered particularly badly in this week’s selloff.

France, Belgium and Spain all sold 50-year bonds in recent weeks, and they are all trading well below their issue prices.

France’s 2072 notes were trading at a cash price of 85.56 and a yield of 0.849%, compared with a yield of 0.593% on issue in mid-January. Belgium’s and Spain’s 50-year bonds were trading at a cash price of 90.68 and 97.082 respectively.

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