Eurozone bond yields head higher before U.S. jobs data

"The jobs market report is unlikely to see the Fed pivot which is why I believe bonds are selling off a bit ahead of the nonfarm data today." Italy's 10-year yield rose as much as 10 bps to 4.608% its highest since Sept.

Eurozone bond yields pushed higher on Friday, back towards the previous week's multi-year highs, ahead of key U.S. jobs data that could provide the Federal Reserve with further evidence to continue its aggressive policy tightening.

A Reuters poll expects the U.S. to have added 250,000 jobs during September in the non-farm payrolls report being released on Friday, below the previous month's 315,000. Average earnings are expected to increase by 0.3% every month. "Short-term market dynamics will be driven by the U.S. employment report today," said Jefferies interest rate strategist Mohit Kumar.

"The market is likely to be more sensitive to today's number given that the recent BoE actions have raised hopes of some investors that the Fed is ready to pivot," Kumar added. Expectations that the Federal Reserve might slow the pace of interest rate hikes ratcheted up after the Bank of England's bond market intervention last week and as some U.S. labour market indicators showed signs of cooling off, a pre-condition for less aggressive monetary policy.

Data this week showed U.S. job openings dropped by 1.1 million, the largest decline since April 2020, to 10.1 million on the last day of August. Still, money markets are currently pricing in an almost 90% chance of a fourth consecutive 75 basis point (bps) rate hike at next month's Fed meeting, according to Refinitiv data.

By 0804 GMT, Germany's 10-year government bond yield, the benchmark for the euro area, was up 6.5 bps to 2.147%. It reached its highest since November 2011 on Sept. 28 at 2.35%. The two-year yield was up 5 bps to 1.835%, its highest level since Sept. 29.

"I don't think the labour market report today will be sufficiently weak for Powell to change communication from his Jackson Hole speech," said Piet Haines Christiansen, chief analyst at Danske Bank. "The jobs market report is unlikely to see the Fed pivot which is why I believe bonds are selling off a bit ahead of the nonfarm data today."

Italy's 10-year yield rose as much as 10 bps to 4.608% its highest since Sept. 29. The European Central Bank this week said it has shrunk its holdings of Italian debt held as part of its Pandemic Emergency Purchase Programme (PEPP) in the last two months, likely as a result of bonds maturing and not being replaced.

This followed a 9.76 billion euros increase in the previous two months when the ECB announced plans to use PEPP reinvestments to prevent bond yields and spreads from rising too far or too fast in the weakest countries. "I think as long as the spread developments are relatively benign and still range trading around 230-250 basis points then I don't think we'll get any intervention from the ECB," Danske Bank's Piet Haines Christiansen said, noting that the pace of spread widening is more important than the level.

The closely watched yield gap between Italian and German 10-year yields was last seen steady at 242 basis points.

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