Euro zone bond yields drop after weak U.S. jobs data

Nonfarm payrolls data showed the U.S. labour market added 175,000 jobs in April, down from 315,000 in March and well below the 243,000 increase economists expected. Bond yields fell across the board as investors bet the numbers would make the Federal Reserve more likely to lower borrowing costs this year and make other central banks feel more comfortable in doing the same.

Euro zone bond yields fell on Friday after data showed the U.S. labour market was much weaker than expected in April, raising hopes for interest rate cuts. Nonfarm payrolls data showed the U.S. labour market added 175,000 jobs in April, down from 315,000 in March and well below the 243,000 increase economists expected.

Bond yields fell across the board as investors bet the numbers would make the Federal Reserve more likely to lower borrowing costs this year and make other central banks feel more comfortable in doing the same. However, a separate survey report later in the day, showing a sharp rise in the gauge of prices paid by services companies in April, caused bond yields to rise again, leaving them just below where they were before the labour figures.

Germany's 10-year bond yield, the benchmark for the euro zone, was last down 4 basis points (bps) at 2.518% after falling as much as 10 bps. Yields, which move inversely to prices, traded at 2.534% just before the jobs data. Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said he was not overly concerned by the survey data on services prices.

"With the labour market softening and indicators of wage growth still firmly pointing lower, we think that the risk of a renewed acceleration in core services inflation is very low," he said. Yields were on track to end the week lower after the Fed held interest rates on Wednesday and Chair Jerome Powell said another hike was unlikely. He suggested rate cuts remain on the table, albeit likely later than expected after a run of strong economic data.

The 10-year U.S. Treasury yield, which sets the tone for borrowing costs around the world, was last down 4 bps at 4.528%, 14 bps lower for the week. Investors expect the European Central Bank will be able to cut interest rates more than the Fed this year, given the euro zone's weaker growth and cooler inflation. However, the power of the U.S. economy means policymakers could be reticent to stray too far from the Fed's path.

Italy's 10-year yield was 4 bps lower at 3.835%, from 3.85% before the U.S. data. The gap between Italian and German 10-year yields - a gauge of the risk premium investors ask to hold bonds of the euro area's most indebted countries - was flat at 131 bps, having earlier fallen to its lowest level since March below 130 bps.

Market participants will focus on Fitch's review of Italy's credit rating after the European market closes. "A negative outlook seems possible today, but we consider it more likely that the rating agency will wait until more clarity on the next budget emerges," said Christoph Rieger, head of rates and credit research at Commerzbank.

He added that the Italian spread recently tightened "defying fundamental impulses."

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