March 28 (Reuters) - Euro zone bond yields edged up on

Thursday after Federal Reserve Governor Christopher Waller

advocated a higher-for-longer rate strategy ahead of inflation

data which could affect the central banks' policy path.

Waller said it was prudent to hold rates at the current

restrictive levels for longer to help keep inflation on a

sustainable trajectory toward 2%.

France, Italy and the U.S. will issue inflation figures on

Friday, while German and euro area-wide data is due next week.

Some analysts argued that markets would need outsized

surprises to shake confidence in the timing of the first ECB

rate cut to be in June, while inflation figures could affect

bets on further ECB rate cuts.

Money markets last fully priced in a 25 bps ECB rate cut by

June and around 90 bps by year-end.

Germany's 10-year bond yield, the benchmark for

the bloc, was up 3.5 basis points (bps) at 2.33%, after hitting

late on Wednesday 2.292%, its lowest level since March 12.

Some analysts argued that hawkish Fed comments provided

bumps in the road for further easing of bond yields, but the

prospects for benign consumer price prints could support Bund

prices. Bond prices move inversely with yields.

Bund yields were set to end the week roughly unchanged, the

month down 8.5 bps and the first quarter up 28 bps.

At the end of December 2023, Bund yields hit their lowest

levels in around one year as markets increased bets on future

rate cuts to over 150 bps.

In 2024, investors reduced their initial forecasts after

strong economic data, and European Central Bank officials pushed

back against market expectations for excessive monetary easing.

Yields in U.S. Treasuries fell on Wednesday before Waller's

remarks, but the focus is on the U.S. core personal consumption

expenditure (PCE) price index data for February, due on Friday.

"The market could react in quite an asymmetric fashion to

tomorrow's PCE release, with an above consensus print prompting

quite a sharp repricing (i.e. removal of a June cut) while

something lower than consensus will need to be reinforced by a

second month's print for investors to gain confidence about

pricing in more than 75 bps of 2024 cuts," Rabobank said in its

morning note.

Italy's 10-year bond yield was up 9 bps at 3.70%

, with the closely watched gap to Germany's 10-year

yield at 136 bps, its highest since March 6.

The yield gap -- a market gauge of risk premium investors

ask to hold bonds of the euro area's most indebted countries --

has corrected sharply after hitting 115.40 in mid-March, its

lowest in over 26 months.

Italian spreads recently tracked yield gaps tightening in

the credit markets while turning a blind eye to Italian state

sector budget deficit.