* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds background) AMSTERDAM, March 19 (Reuters) - Benchmark German bonds rose on Friday, tracking U.S. Treasuries, and were set to end the week unscathed from a hefty bond sell-off across the Atlantic. With investors digesting the U.S. Federal Reserve’s willingness to let inflation drift above target after Wednesday’s meeting, U.S. 10-year Treasury yields on Thursday shot up to their highest since January 2020, pulling euro area bond yields up with them. But markets calmed on Friday with Treasury yields falling and German 10-year yields, the benchmark for the euro area, down 3 basis points (bps) to -0.29%, set to end the week almost unchanged. In contrast, 10-year U.S. Treasury yields are down 1 bps on the day, while rising 8 bps this week to about 1.7%. The market largely shrugged off a Federal Reserve announcement that it was letting a temporary bank leverage exemption rule expire. The chart below shows the weekly absolute change in German and U.S. yields. “The 10Y U.S. Treasury yield reached 1.75%, and the 1.75-2% range appears to be where the market wants to eventually get to,” ING analysts said. But the bigger picture is mixed, as 30-year German bond yields - which rose to their highest since January 2020 on Thursday - having risen more than their U.S. equivalents this week. Thursday’s sell-off also pushed the gap between 10- and 30-year German bond yields to its largest since 2019, meaning that longer-dated yields are rising more quickly than shorter-dated. Analysts said that even though the euro area bonds had outperformed those in the United States, the higher yield levels are still concerning in the aftermath of the European Central Bank’s decision last week to accelerate its bond purchases. Driven by bets that a vast U.S. fiscal stimulus package will boost growth and inflation, the bond sell-off has largely been seen as exported to Europe, stoking fears of an unwarranted tightening in financial conditions in the bloc, which faces a weaker recovery outlook than the United States. “One week after the ECB meeting, markets must be wondering when precisely the ‘significant’ increase in PEPP purchases will unfold - or if the selling pressure by investors is materially higher,” Michael Leister, head of interest rates strategy at Commerzbank, told clients. Headlines on Friday underscored the weaker outlook in the euro area. France imposed a month-long lockdown on Paris and parts of the north after a faltering vaccine rollout and spread of highly contagious coronavirus variants forced President Emmanuel Macron to shift course. Several euro area countries were set to resume vaccinations with AstraZeneca’s shot on Friday after the European Medicines Agency said its benefits still outweighed the risks.