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German yields rise to two-month high, Austrian debt sale sees record demand

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Sept 16 (Reuters) - Germany's 10-year yield touched a new two-month high on Thursday after U.S. data delivered positive surprises, while Austria received record demand for a debt sale.

Euro zone bond yields edged up after data showed U.S. retail sales unexpectedly increased in August and the Philadelphia Federal Reserve business conditions index came in higher than expected.

Germany's 10-year yield, the benchmark for the bloc, rose to a new two-month high at -0.283% and was up nearly 2 bps at -0.29% by 1333 GMT, tracking U.S. Treasury yields higher following the data.

"I think with the Fed so close the market is a little bit reactionary to data like this," said Peter McCallum, rates strategist at Mizuho, referring to next week's U.S. central bank meeting.

"It certainly does give the hawks a little bit more ammunition, perhaps the way the Fed announces the tapering," he said, though adding that the bank's base case is still for the Fed to announce the tapering of its bond purchases in November.

Focus was also on the primary market.

Austria received a record 42 billion euros of investor demand for a new 15-year bond, its finance agency said.

The deal will raise 5 billion euros, according to a lead manager memo seen by Reuters. Austria will retain 500 million euros of the bond, the memo said.

Christian Schreckeis, head of issuance and portfolio management, investor relations and federal budget at the Austrian finance agency, said this being Austria's last syndication of the year, and 16 billion euros of redemption flows from a bond that matured on Wednesday, helped boost demand.

"Yields remain low and so investors want to pick up yield by extending maturity. The tenor choice matched investor demand well, when most other syndicated supply has been shorter on the curve," Schreckeis added.

More supply on Thursday came from auctions.

Spain raised 5.19 billion euros from bonds due 2024, 2026 and 2031.

France raised 9 billion euros from bonds due 2024, 2026 and 2027 and another 1.86 billion euros from inflation-linked bonds due 2026, 2031 and 2040.

Elsewhere, European Central Bank head Christine Lagarde said the euro zone economy is recovering quicker than anticipated just six months ago, thanks to the bloc's vaccination campaign that has allowed large sections of the economy to reopen.

The combined GDP of the bloc was now expected to return to its pre-crisis level before year-end, Lagarde added.

Earlier, Finnish central bank chief Olli Rehn said any exit from ECB crisis stimulus would be very gradual and would ensure favourable financial conditions were maintained.

The ECB last week decided to slow its pandemic emergency bond buying during the fourth quarter. (Reporting by Yoruk Bahceli Editing by Mark Potter and Andrew Cawthorne)

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