German real yields in biggest monthly fall in nine years

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices throughout)

By Yoruk Bahceli

July 30 (Reuters) - German government bond yields closed on Friday after their biggest monthly fall since January 2020, while inflation-linked yields had their largest decline in nine years, part of a global debt rally fed by fears that a COVID-19 resurgence would crimp growth.

Signs economic growth might be peaking drove bond yields sharply lower across the world in the past month. The rally fed on itself as investors caught on the wrong side of the trade scrambled to get back in.

The yield on Germany's 10-year bond, the benchmark for the euro area, fell around 25 basis points in July, its biggest monthly decline since January 2020, before the pandemic spread globally and rattled markets.

The yield was flat on the day at around -0.45%.

The 10-year inflation-linked bond yield dropped more than 30 bps in July, the biggest fall since July 2012, the height of the euro zone debt crisis when the then European Central Bank-president Mario Draghi promised to do "whatever it takes" to maintain the single currency.

The yield hit a new record low around -1.85% on Friday.

Elsewhere in the euro zone, Italy's 10-year yield saw its biggest monthly fall since last September. Other yields across the bloc closed broadly unchanged on the day.

The ECB's decision in early July to adopt a symmetrical, 2% inflation target has also supported the bloc's debt market. The move means interest rates will be kept at record low levels for longer, temporarily allowing an inflation overshoot.

That has largely been seen as implying that low rates and bond buying will be upheld for the foreseeable future.

"[Current ECB President Christine] Lagarde didn't have such kind of wording but the result is the same," said Pascal Perrone, portfolio manager at Eric Sturdza Investments.

German bonds -- both nominal and inflation-linked -- also modestly outperformed U.S. Treasuries, which initially drove the July rally, though U.S. yields took another lurch lower after data showed core inflation rising less than forecast in June

"For the Bunds... they were a bit delayed in their response compared to the U.S... The economic data were topping up in the U.S. before the euro zone, so it's normal that this adaptation was a bit later in the euro zone," said Patrick Krizan, senior economist at Allianz.

The euro area economy grew faster than expected in the second quarter, while inflation shot past the European Central Bank's 2% target in July.

But Bert Colijn, ING senior eurozone economist, said Lagarde had made it clear the ECB would not act on temporary inflation.

"This release didn't provide much evidence of more structural inflation as core inflation fell back from 0.9% to 0.7%", he added, referring to a narrower inflation measure the ECB tracks which excludes food and energy costs.

Still, on Friday, a key gauge of long-term euro zone inflation expectations extended its rise above 1.70% for the first time since late 2018.

(Reporting by Yoruk Bahceli; Editing by William Maclean and Mike Harrison)

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