UPDATE 2-Euro zone bond yields rise after U.S., Germany inflation data

March 30 (Reuters) - Euro zone government bond yields rose on Thursday as inflation data on both sides of the Atlantic were stronger than expected while market bets on the European Central Bank's terminal rate consolidated at around 3.5%.

Spanish inflation cooled off, while German consumer prices rose by a more-than-anticipated 7.8% on the year in March, according to preliminary data.

Germany's 10-year government bond yield, the bloc's benchmark, rose 7.5 basis points (bps) to 2.38%.

The 2-year yield rose 13 bps to 2.76%.

The U.S. Personal Consumption Expenditure (PCE) -- the Federal Reserve's preferred gauge of inflation -- rose by 4.4% versus consensus of 4.3%.

The focus of investors shifted to inflation, while mixed signals came from wage negotiations in Germany and recent remarks from central bank officials.

Some analysts flagged that the ECB will be on alert after negotiations for Germany's public sector failed.

Public sector employers have offered an 8% pay raise, or a minimum of 300 euros per month, while trade unions have demanded a 10.5% raise or at least 500 euros more per month under a collective bargaining agreement with a term of 12 months.

Andrzej Szczepaniak, European economist at Nomura, said comments from ECB officials on Wednesday, with one outspoken conservative floating the idea of a slowdown in the pace of increases, were affecting markets.

Slovak central bank chief Peter Kazimir, a proponent of rapid rate increases, made the case for slower rises following three straight 50-basis point hikes.

Italy's 10-year government bond yield rose 10.5 bps to 4.24%, with the closely watched spread between German and Italian 10-year yields - a gauge of investor confidence in the more highly indebted countries of the euro zone - at 185 bps.

Euro area borrowing costs rose in the last few sessions, with market bets on ECB rate increases stabilising after strong volatility.

The September 2023 ECB euro short-term rate forward (ESTR) was around 3.45% on Thursday, implying market expectations for the deposit facility rate to peak at 3.55%. November 2023 forward peaked at about 4% on March 8.

"After regional banking turmoil in the U.S., fears of a credit crunch still weigh on the market, capping rates," said Antoine Bouvet, head of European rates strategy at ING.

Some market participants believed a line had been drawn under systemic banking worries, but they argued caution was needed as turns in market sentiment in recent weeks had been sudden and violent.

"Central banks managed to convince markets to disaggregate banks' potential liquidity problems from solvency issues and they have the tools to tackle the risks of a banking crisis," said Colin Graham, head of multi-asset strategies at Robeco.

Analysts said a market stress indicator, such as the euro swap spread, was in the low part of the current range, ripe for a retracement through the levels prevailing in early March.

The gap between two-year euro swap rates and two-year German bond yields was at 69 bps after peaking at around 90 bps a couple of weeks ago due to strong demand for safe-haven bonds. It was at about 60 before fears of a banking crisis started worrying financial markets. (Reporting by Stefano Rebaudo; Editing by Amanda Cooper, Alex Richardson and Angus MacSwan) ;))