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German 10-year yield falls to 7-week low before inflation reports

* Euro zone periphery govt bond yields

AMSTERDAM, Sept 29 (Reuters) - Germany’s 10-year bond yield fell to its lowest in over a week before first-estimate inflation readings for September on Tuesday, which will set market tone just as policymakers appear divided on how to react to cope with a second COVID wave.

Annual inflation in Germany’s Saxony region held steady at 0.1%. Readings from several other states will follow, and the national reading is due at 1200 GMT. It’s expected to remain at -0.1%. Euro zone-wide data will follow on Friday.

Inflation data come as European Central Bank policymakers appear increasingly divided on whether fresh stimulus is needed amid a fresh wave of coronavirus infections.

Hawkish policymakers argue the bank is downplaying good news from economic indicators. Dovish policymakers are pushing ECB President Christine Lagarde to adopt stronger language on the risks to growth and the threat from euro appreciation.

“With governing council battle lines already drawn ahead of the upcoming debate on whether to extend monetary easing, we think economic data has a greater role in shaping rates markets price action,” ING analysts told clients.

Germany’s 10-year yield was down about 1 basis point in early trade at -0.542%, its lowest in over seven weeks.

A key market gauge of long-term inflation expectations in the euro zone closed Monday at its lowest since July at 1.378% , below the ECB’s target of close to, but below 2%.

Business climate and consumer confidence data for the euro zone are also due, at 0900 GMT.

There was also some focus on the ECB’s weekly bond purchase data released late on Monday, which showed buying under its emergency pandemic purchase programme increase marginally to its highest since late July.

“The data suggests that the hawks on the governing council may not have succeeded in their aim to tacitly keep purchases lower,” Christoph Rieger, head of rates and credit research at Commerzbank, told clients.

In the primary market, Italy will raise up to 8.25 billion euros in an auction of five, 10-year and floating-rate bonds [nL5N2GK29R}. Finland will raise up to 1 billion euros from a bond due 2036. (Reporting by Yoruk Bahceli, editing by Larry King)