Using New Outlook on Windows for personal email, calendar, and contact management
Hello,
There might be a misunderstanding here. If you have a hotmail.com address, it doesn't mean the same username but @outlook.com domain is reserved for you. They are technically two different email addresses.
The normal way to create this outlook.com alias is via
go to Your Info > Sign in preference, Add an alias.
Create new: this will allow you to use the native domain outlook.com to create a new alias.
However, if someone else arleady took that same username you desired, then there's not much you can do about it unfortunately. That's why it tells you it exists.
I will explain why you also got a bounce back email. The user who owned this outlook.com address at some point either deleted this email address, or didn't use it for 2 years so the email address got deleted by Mcirosoft. However, Microsoft doesn't allow recycle its own hotmail.com/outlook.com address, out of privacy and security concern, as they don't want you to end up getting emails meant for the previous owner. So, even if that address is deleted, it is reserved and cannot be created /used by others.