German bond yields track Treasuries higher after robust U.S. payrolls

By Yoruk Bahceli

AMSTERDAM (Reuters) -Euro zone bond yields tracked U.S. Treasury yields higher on Friday as above-forecast June U.S. jobs data signalled labour market strength and brought focus back to inflationary pressures.

Non-farm payrolls increased by 372,000 jobs last month, the Labor Department’s employment report showed. Economists polled by Reuters had forecast 268,000 jobs added last month.

Yields in Europe had been lower earlier on Friday, after the previous day’s sharp rises, but moved up after the data which more or less cements the prospect of a 75 basis-point U.S. rate hike this month.

Ten-year German yields, the benchmark for the euro area, touched a session high of 1.34% just after the data, before ceding the rise to stand flat on the day around 1.298%. U.S. 10-year Treasury yields rose 4.5 basis points to 3.05%.

Bond markets have swung wildly this week, with economic data and central bank rhetoric driving a battle between inflation and recession fears and similar moves were apparent after the payrolls.

“Looking through the fog of volatility, the overall picture remains one of peaks in both nominal and real bond yields,” said Arne Petimezas, senior analyst at AFS Group.

Germany’s 10-year yield had risen as high as 1.92% in mid-June before recession fears grew and real, inflation-adjusted yield has slipped to -0.76%, from -0.37%.

A key market-gauge of long-term euro zone inflation expectations has dropped to the lowest since March at just over the ECB’s 2% inflation target, but rose to 2.05% following the U.S. data.

Italy’s 10-year yield also rising off session lows to around 3.34%, was still down two bps on the day. Its spread over Germany, a key measure of the risk premium, held at 204 bps.

It had widened for part of the session on Thursday after a Bloomberg News report suggested policymakers are not displaying certainty that the European Central Bank’s tool to fight an “unwarranted” divergence in borrowing costs will be ready at its policy meeting on July 21.

Traders have also increased their bets on how much the ECB will raise this year, now pricing around 145 bps of hikes by December, versus 135 bps on Thursday.

Markets also price 83 bps of hikes by September, having at one point cut those bets below 75 bps.

“The thinking there would be, do they go 50, 50 (bps) in July and September. In the ECB accounts we saw some people raising that as a possibility,” said Peter McCallum, rates strategist at Mizuho.

The ECB said at its June meeting that it expected to hike rates by 25 bps at its next meeting, and could hike by a bigger increment in September depending on data.

But, “euro zone inflation data is a bit mixed, the growth outlook isn’t so strong, so 25 (bps) should still be a fairly comfortable base case,” McCallum said.

(Reporting by Yoruk Bahceli; additional reporting by Sujata Rao Editing by Angus MacSwan, Kim Coghill and Jonathan Oatis)