By Abhinav Ramnarayan
LONDON, Dec 1 (Reuters) - Euro zone government bond yields rose from two-month lows on Wednesday after the U.S. Federal Reserve said inflation was here to stay and indicated a quicker taper of bond purchases despite worries around the new Omicron coronavirus variant.
U.S. central bankers in December will discuss whether to end bond purchases a few months earlier than expected, Federal Reserve Chair Jerome Powell said, pointing to a strong economy, stalled workforce growth and high inflation that is expected to last into mid-2022.
Afer months of cautious indications from policymakers, where inflation was viewed largely as transitory, this reversal was enough to lift government bond yields of major economies off recent lows.
Yields had dropped to their lowest levels in months this week as investors fled to the safety of government bonds because of the Omicron variant and its potential impact on economies.
"The Fed Chair made a forceful case for a faster taper despite lingering Omicron uncertainties, noting inflation is likely to stay elevated," said Deutsche Bank chief strategist Jim Reid. "A faster taper ostensibly opens the door to earlier rate hikes."
Short-dated U.S. Treasury yields were up six basis points (bps) in early European trade to 0.59%, adding to an 8 bps rise on Tuesday night.
The gap between two-year and 10-year U.S. Treasuries was at its narrowest level since January at 88 bps.
In the euro zone, Germany's 10-year bond yield, the benchmark for the bloc, was 3 bps higher on the day at -0.31%, rising off Tuesday's two-month low of -0.363%.
Other euro zone government bond yields were up 2-4 bps across the board, with Italian 10-year bond yields -- seen as the most vulnerable to monetary policy tightening -- up 4 bps at 1.02%.
While consumer price rises in Europe are generally expected to lag the United States, a strong euro zone inflation number on Tuesday did put some upward pressure on yields, particularly in the light of Powell's testimony.
"The upside surprise in euro zone core CPI on Tuesday suggests that the soaring inflation in Europe is more structural than some perhaps thought," Mizuho analysts said in a note.
"(ECB chief) Lagarde has stuck to the transitory script so far, although it is hard to believe that yesterday's reading will not add upside risk to the ECB's inflation projection," they wrote.
Investor expectations for long-term euro zone inflation rose to 1.86% on Wednesday from 1.80% last week, according to the five-year, inflation-linked forward swap, a key money market gauge.
The Bank of England's Andrew Bailey is due to speak at 1400 GMT on Wednesday and Powell at 1500 GMT. The market will look for further clarity on the direction of policy in light of the Omicron variant risks, analysts said. (Reporting by Abhinav Ramnarayan; Editing by Edmund Blair)