U.S. jobs data miss curbs euro zone bond sell-off

Euro area benchmark German 10-year yields reversed an earlier rise and dropped as much as 3 basis points to -0.26% following the news, less than U.S. Treasury yields. "Bunds yields have not fallen much because the miss in non-farm payrolls aligns the Federal Reserve to the ECB's policies and tames fears of 'tapering'", said Althea Spinozzi, fixed income strategist at Saxo Bank, referring to market expectations of higher U.S. inflation.

Higher rated euro zone bond yields dipped on Friday after U.S. employment data missed expectations, but Italian bonds underperformed as an ECB policymaker drew attention to the possibility of a slowdown to pandemic stimulus next month.

The U.S. economy added just 266,000 jobs in April, a fraction of nearly a million expected. Euro area benchmark German 10-year yields reversed an earlier rise and dropped as much as 3 basis points to -0.26% following the news, less than U.S. Treasury yields.

"Bunds yields have not fallen much because the miss in non-farm payrolls aligns the Federal Reserve to the ECB's policies and tames fears of 'tapering'", said Althea Spinozzi, fixed income strategist at Saxo Bank, referring to market expectations of higher U.S. inflation. The news reversed some of the rise in Italian yields on Friday but the risk premium they pay on top of Germany remained elevated at 114 basis points.

Italian 10-year yields earlier rose to the highest since September 2020, after ECB policymaker Martin Kazaks said the ECB can decide to reduce the pace of its emergency bond purchases (PEPP) in June if borrowing costs remain low. The ECB accelerated the pace of PEPP buying for the second quarter at its March meeting to hold down a rise in bond yields. It will have to revisit that decision in June.

"As markets reacted to this, it seems like markets really want to catch the absolute start of the tapering of net purchases discussion that eventually will happen this year," said Piet Christiansen, chief analyst at Danske Bank. Kazaks also believes the bank would "certainly discuss" increasing its conventional bond purchases if the inflation outlook keeps to the current forecast when PEPP expires.

Uncertainty about the future pace of ECB bond buying has weighed on Italian bonds, a key beneficiary, alongside supply pressures given 40 billion euros of additional fiscal stimulus announced in April. Expectations of a 30-year bond triggered a sell-off on Thursday. "I wouldn't read the move in BTP spreads as the market questioning the credibility of (Prime Minister Mario) Draghi's plans for the future, it's more the heavy supply that is expected in the shorter term," Annalisa Piazza, fixed income research analyst at MFS Investment Management.

"This is probably going to happen before the end of Q2... It makes sense to issue the bonds now, (while) we know that the ECB is stepping up… with the PEPP purchases." Moody's will review Italy's credit rating later on Friday, which Commerzbank analysts expect it will reaffirm at one notch above junk.

It follows S&P which reaffirmed its Italian rating -- a notch higher than Moody's and the highest of the main rating agencies -- in April as it balanced the pandemic-related deterioration of Italy's finances against ECB and European Union support.

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