* Euro zone inflation beat expectations
* German yields back at 0.445 pct, cancelling early fall
* BoJ tweak still significant, say analysts
* IMF reviews Greece debt sustainability (Updates prices for close, adds move in Greek yields)
By Abhinav Ramnarayan and Virginia Furness
LONDON, July 31 (Reuters) - A rally in euro zone government bonds faded on Tuesday, after preliminary data showed inflation in the bloc was higher than expected in July, while concerns about long term Greek debt sustainability drove up yields across its curve.
Euro zone bond yields — which move inversely to the price — dipped 3-4 basis points in early trade after the Bank of Japan vowed to keep rates low, but the euro zone inflation data pushed borrowing costs back up.
Headline consumer inflation accelerated to 2.1 percent year-on-year from 2.0 percent in June, while core inflation, which excludes energy costs as well as unprocessed food, rose to 1.3 percent year-on-year from 1.2 percent in June, beating economists’ expectations.
“(In the) core euro zone we have an seen initial recovery in rates, the lower yields were short lived in the case of Bunds which are back at where they closed yesterday, mainly on the back of euro zone inflation data today,” said ING’s senior rates strategist Benjamin Schroeder.
Indeed, Germany’s two-year bond yield touched an eight-week high at minus 0.57 percent.
Its 10-year bond yield was flat in late trade at 0.45 percent, giving up earlier falls after the inflation data. It was set to end July with a rise of 14 bps - the biggest monthly rise since January.
French 10-year government bond yields, which fell as much as 5 bps at one point, were down just 1.2 bps at 0.74 percent.
A long-term gauge of market euro zone inflation expectations, the five-year, five-year breakeven forward, extended its rise after the data.
The measure, tracked closely by the European Central Bank, rose to its highest level in over five weeks at 1.7454 percent — before settling at 1.7379 percent.
Greek bond yields rose to three-week highs after the International Monetary Fund warned that the country’s long term debt sustainability was uncertain on account of optimistic assumptions on Greek growth and primary surplus.
Greek five-year government bond yields rose to a high of 3.05 percent and 10-year Greek yields climbed to 3.98 percent.
Earlier in the session, German and French government bond yields had fallen after the Bank of Japan vowed to keep interest rates low, a move that means Japanese investors are likely to continue investing in the euro zone bond market.
The BOJ took measures to make its massive stimulus programme more flexible but pledged to keep interest rates low for the time being on Tuesday, reflecting its forecast that it would take time for inflation to hit its 2 percent target.
“I think we’ll be looking back at this tweak and see it as a signal that yields could have hit their lows and could be at the beginning of an extremely moderate and slow rise — but a rise nonetheless,” said Mizuho’s head of rates Peter Chatwell. (Reporting by Abhinav Ramnarayan and Virginia Furness; Addditional reporting by Dhara Ranasinghe; Editing by Catherine Evans and Alison Williams)