Euro zone bond yields ease as focus turns to US payrolls report

Euro zone government bond yields dipped on Friday, stabilising at the end of a volatile week, ahead of potentially disruptive U.S. data on monthly employment where a weak report could see Bunds lag Treasuries.

Germany's 10-year yield, the benchmark for euro zone bonds, was down 2 bps at 2.708%, cooling off from the five-month peak of 2.80% touched earlier in the week. Similarly, the 30-year German yield edged lower to 3.333%, extending its decline after hitting a 14-year high of 3.434% on Wednesday, amid a global selloff in long-duration government debt due to worries over the sustainability of public finances in developed economies.

Other regional bond yields, like those in France and Italy, were trading largely in line with their German counterparts. Unstable politics and reduced demand from investors like pension funds for long-dated debt have also weighed on long-duration bonds this week, with markets now awaiting the outcome of a no-confidence vote in France on September 8.

"Political uncertainty is set to remain elevated through this process, but we aren't sure that's enough to trigger any uncontrolled OAT swings and, by extension, significant pressure on the euro as the no-confidence outcome appears largely priced in," analysts at ING said in a note. France's 30-year bond yield was last down 2 bps at 4.384%.

In the near-term, weaker U.S. labour market indicators have helped cement expectations of a rate cut by the Federal Reserve this month, pulling long-dated yields below this week's multi-year highs. Those expectations could be tested later in the day, if non-farm payrolls increase by more than expected.

Analysts at RBC Capital Markets expected a gain of 64,000 jobs in August alongside an uptick in the unemployment rate to 4.3%. If the numbers come in line with those expectations, yields on U.S. Treasuries could move slightly higher in a profit-taking reaction following the decline in yields over the last few sessions, said Peter Schaffrik, global macro strategist at RBC Capital Markets.

The rate-sensitive two-year U.S. Treasury yield was last a touch lower at 3.58%, lingering near its lowest level since May after retreating from a peak of 3.6780% hit on Tuesday. However, a payrolls report that comes in well below expectations, and reinforces the need for a Fed rate cut, could trigger a larger rally in Treasury prices.

That could push yields down faster than those on German debt, which are factoring in almost no chance of another rate cut in the euro zone for the coming months.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)