European government bond yields continue to drop

"This environment proved a great backdrop for Treasuries," Deutsche Bank strategist Jim Reid said in a daily note, while "back in Europe, sovereign bonds rallied alongside U.S. Treasuries as investors caught up with Chair Powell’s speech and priced in a more dovish outcome for the ECB (European Central Bank) as well." U.S. benchmark 10-year yields have fallen 17 basis points this week, and two year yields have lost 27 basis points.

European government bonds on Friday were set to post weekly gains having rallied in the slipstream of advances in U.S. Treasuries, although U.S. jobs data due later in the day could disturb the trend. Germany's 10-year bund yield, the benchmark for the euro zone, was last at 1.77%, down 4.6 basis points, trading around at its lowest since early October and down nearly 19 basis points on the week.

Italy's 10-year bond yield was at 3.66%, also down around 4 basis points on the day and set for a 18-basis-point weekly decline. Bond yields move inversely to prices.

The rally in government bonds globally was driven by hopes the U.S. Federal Reserve will move away from its aggressive pace of interest rate hikes, sparked by a dovish speech by Fed chair Jerome Powell on Wednesday - as well as U.S. data on Thursday that raised concerns about slowing economic growth while also indicating a slowdown in inflation. "This environment proved a great backdrop for Treasuries," Deutsche Bank strategist Jim Reid said in a daily note, while "back in Europe, sovereign bonds rallied alongside U.S. Treasuries as investors caught up with Chair Powell's speech and priced in a more dovish outcome for the ECB (European Central Bank) as well."

U.S. benchmark 10-year yields have fallen 17 basis points this week, and two year yields have lost 27 basis points. Traders were also watching U.S. payrolls data due later on Friday to see whether this would do anything to disrupt the narrative of slowing economic growth.

Analysts expect the data to show U.S. November job growth was the smallest in nearly two years. Shorter dated European government bonds also rallied. The German two-year yield was 5 basis points lower at 1.98% and the Italian two-year yield dropped a similar amount to 2.56%.

The closely watched spread between Italian and German 10-year yields was 187 basis points.