Euro zone bond yields dip ahead of U.S. data

More dovish signals came from the European Central Bank (ECB) with President Christine Lagarde saying the euro zone's economy is beginning to rebound from a pandemic-induced slump but this recovery remains fragile. Meanwhile, concerns about the impact on the global economy of a possible monetary tightening in China and of the Delta variant are expected to keep risk sentiment on hold.

Eurozone government bond yields edged lower on Friday with investors on hold ahead of U.S. jobs data which might affect the Federal Reserve's narrative about the economy and its monetary policy stance. More dovish signals came from the European Central Bank (ECB) with President Christine Lagarde saying the euro zone's economy is beginning to rebound from a pandemic-induced slump but this recovery remains fragile.

Meanwhile, concerns about the impact on the global economy of a possible monetary tightening in China and of the Delta variant are expected to keep risk sentiment on hold. The Shanghai Composite stock index fell 1.2%, on speculation the Chinese central bank could begin tightening monetary policy and some possible unease among overseas investors over President Xi Jinping's warning to foreign powers in a speech to mark his party's centenary.

"The ongoing anxiety about the Delta variant, China, could increasingly become a factor after the softer PMIs," Commerzbank analysts told clients in a note. Germany's 10-year government bond yield, the benchmark of the bloc, fell 1.5 basis points to a fresh low since June 21 at -0.216%.

The Fed has been focusing on the labor market's recovery and inflation, and most analysts think it will take a couple more months before those trajectories become more evident. "I expect a quiet morning today ahead of U.S. data, and that number has to be way off consensus for it to affect the market. Otherwise, I think the current stabilization phase will continue," Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, said.

"Overall, positioning appears to have become more balanced, but a downside surprise still looks set to underpin U.S. Treasuries and Bunds," the Commerzbank analysts added. The focus is on ECB speakers as investors increasingly worry about tapering in the eurozone with bond supply in the bloc likely to increase in 2022 when the Pandemic Emergency Purchase Programme (PEPP) expires.

Eurozone government bond and European Union supply "is likely to increase in 2022", Citi analysts said. "To keep annual net cash requirement unchanged the Asset Purchase Programme (APP) will need to be increased to €55bn per month after PEPP ends for EGBs and significantly more for EU."