* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
By Yoruk Bahceli
July 30 (Reuters) - German government bond yields were set for their biggest monthly fall since January 2020 on Friday, in a steady market as investors eyed inflation data for the bloc.
Fears that economic recovery was peaking and may not be as strong as expected drove bond yields sharply lower across the world in July. The rally fed on itself as investors caught on the wrong side of the trade scrambled to get back in.
Germany's 10-year bond, the benchmark for the euro area, saw its yield falling nearly 25 basis points in July, setting it for its biggest monthly fall, or best performance, since January 2020, before the pandemic spread globally and rattled markets. Bond yields move inversely with prices.
German bonds have also outperformed U.S. Treasuries, which initially drove July's bond rally.
"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 adaption was a bit later in the euro zone," said Patrick Krizan, senior economist at Allianz.
"In the Bund you have currently strong seasonal effects. The supply and demand is definitely in the summer months and German Bund supply is not that ample, it's a narrower market. And then it's the whole story about the ECB strategy review, which implicitly I would say was admitting that asset purchases would be there to stay for the foreseeable future," Krizan added.
The European Central Bank adopted a symmetrical, 2% inflation target earlier in July which will see it keep rates at record lows for longer.
Euro area bond markets were steady on Friday with most 10-year bond yields unchanged to one basis point higher by 0707 GMT.
Focus is on euro area data releases on Friday, with the bloc-wide flash inflation readings and second quarter GDP data due at 0900 GMT. A Reuters poll expects inflation to have increased slightly to 2% in July and GDP to have grown 1.5% quarter-on-quarter.
"The beat in German CPI yesterday also brings upside risk to the eurozone-wide measure today, although some of the rise owes to (value added tax)-related base effects," ING analysts told clients.
"Crucially, core is due to fall which should also mitigate the message from higher headline inflation," they added, referring to the narrower measure of inflation which excludes volatile food and energy prices. A Reuters poll expects to fall to 0.7%, far below the ECB's 2% target.
(Reporting by Yoruk Bahceli, Editing by William Maclean)