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UPDATE 2-German 10-year yields rise but set for biggest monthly fall since April

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds details, comments, updates prices)

LONDON, Sept 30 (Reuters) - German 10-year bond yields rose from their lowest in nearly two months on Wednesday but were set for their biggest monthly drop since April as fears around a second coronavirus wave continued to support safe-haven bonds.

Risk appetite picked up on both sides of the Atlantic after the U.S. session open, as surveys showed business conditions in Chicago improved far more than expected and private U.S. employers stepped up hiring in September.

A further boost to risk assets came as optimism grew for a breakthrough on a U.S. coronavirus-related relief bill.

That pushed Germany’s 10-year yield up 3 basis points to -0.52% in late trade, rising from its lowest since early August at -0.55% touched earlier.

Investors earlier had been cautious after Tuesday’s U.S. presidential election debate.

But safe-haven bonds were expected to remain supported in the longer term, with 10-year German yields set for their biggest monthly drop since April, down about 13 basis points this month.

“This is a temporary correction, within otherwise -- one would think -- a likely ongoing supportive bullish trend, certainly when it comes to fixed income,” said Richard McGuire, head of rates strategy at Rabobank, who expects 10-year Bund yields at -0.60% by the end of the year.

Renewed concerns about the economic impact of rising coronavirus cases in Europe, weak inflation, and U.S. election uncertainty have boosted demand for fixed income assets in recent weeks.

European Central Bank chief Christine Lagarde meanwhile set the scene for changing the ECB’s strategy to align with that of the U.S. Federal Reserve, possibly including a commitment to let inflation overshoot after it has been low for too long.

In her first update on the ECB’s current review of its strategy, Lagarde also raised the idea that the ECB might in future focus on achieving its elusive near-2% inflation goal more quickly.

“In our view she is making a very clear case for a symmetric goal of 2%,” said Nick Kounis, head of financial markets research at ABN AMRO.

Lagarde spoke as first estimates showed Italy’s EU-harmonised inflation declined 0.9% in September from a year earlier, pointing to deepening deflation. A day after German data showed inflation fell far more than expected., it was another bad sign ahead of the euro area reading due Friday.

Analysts said a media report on Tuesday citing the possibility of a delay to the EU Recovery fund could explain the weakness in peripheral bond markets.

Italian 10-year bond yields were up 3 basis points to 0.87% in late trade.

Reporting by Dhara Ranasinghe and Yoruk Bahceli;, Editing by Catherine Evans

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