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try to remove the option o -Pz
or replace with w -Pzw

Try:
cat << EOF > new_file
nodegroups:
check-hosts: L@$(cat input_file)
EOF

or

{
printf "nodegroups:\n check-hosts: L@"
cat input_file
} > new_file

Last line should work but with a minor modification:

sed '/Searching Checks. Based on search criteria/,/name: Value : Carbon_CPU/d' test1

You say you want to remove useless repeated data, but the code you are using replaces every copy of the data (not just repeated data) with a <space> character (even if the data you want to "remove"...

Use double quotes to preserve whitespace:

echo "$line"