Bonds squeezed by hotter European inflation
China PMI highest since April 2012
Dollar slips; pound and euro rise

LONDON, SINGAPORE March 1 Reuters World stocks rebounded on Wednesday after China39;s manufacturing activity expanded at the fastest pace in more than a decade, while strongerthanexpected inflation numbers across the euro zone battered government bonds.

Inflation data from German regions, a day after February numbers showed price pressures surged more than expected across France and Spain, stoked fears that the European Central Bank would need to raise rates further.

Germany39;s 2year government bond yield , highly sensitive to changes in interest rate expectations, rose to its highest since October 2008 at around 3.20, and was last up 8 basis points bps on the day. Bond yields rise as prices fall.

The surprises in January inflation releases have challenged hopes for a smooth return to target inflation, said Bruno Schneller, a managing director at INVICO Asset Management.

Sticky inflation might compel central banks to raise rates further in order to prevent further economic damage, he said.

Consequently, the risk of policydriven recessions could rise, he added.

Twoyear Treasury yields , a guide to shortterm U.S. rate expectations, were close to fourmonth highs, but at 4.85, are below a November peak around 4.88.

The next flush of economic indicators are likely to be crucial as markets gauge whether future rate hikes are sufficiently priced in…