MILAN- Euro zone government bond yields rose on Tuesday, tracking U.S. Treasury borrowing costs as investors awaited a Federal Reserve policy meeting.

Data showed an acceleration in producer prices last month as supply chains struggle to meet demand, while retail sales dropped more than expected. 

According to ING analysts, "U.S. producer prices data are indicating a broadening out of inflation pressures."

"The manufacturing sector is experiencing growing corporate pricing power. This suggests price pressures will continue to build, which is another reason for us to believe consumer price inflation could stay higher for longer," they said.

"U.S. retail sales dipped but remain at incredibly strong levels," they added.

U.S. 10-year Treasury yield erased their earlier losses and was now up 0.5 basis points, after rising by 4 basis points on Monday on concerns that the Fed could sound more hawkish than expected at its two-day meeting, which starts on Tuesday. 

"It thus appears that the U.S.-led short-squeeze has run its course. The evidence from futures positioning suggests that the squeeze has probably had its origin in real money as speculative net shorts were already at multi-year lows last Tuesday," Commerzbank analysts told clients.

"Overall, we suggest using any further resilience in Bunds to scale into tactical shorts ahead of the FOMC," they added.

Germany's 10-year government bond yield was up 2 basis points at -0.24%.

The European Union received more than 107 billion euros ($130 billion) worth of demand for its bond. The bond, due July 4, 2031, will price 2 basis points below the mid-swap rate, according to the lead manager. That is equivalent to a yield of around 0.06%, according to Reuters calculations. 

Unicredit analysts, interpolating EU securities with a maturity close to the new one, estimated a fair value for the yield of 0.04%.

"EGBs (European government bonds) could remain supported from the dovish ECB line-up, with only Holzmann holding some hawkish risk in the afternoon," according to Commerzbank analysts.

The ECB will discuss a transition away from emergency bond purchases in "due course" but possibly as soon as September, Finnish central bank chief Olli Rehn said on Tuesday.

More comments from ECB officials supporting the view that there is no hurry to taper the central bank's aggressive emergency stimulus continue to support mostly peripheral bonds.

Italy's 10-year government bond yields was up 0.5 bps to 0.777%, near multi-week lows.

(Reporting by Stefano Rebaudo; Editing by Alistair Bell) ((stefano.rebaudo@thomsonreuters.com; +390266129431;))