Eurozone Bond Yields Surge Amid Robust U.S. Job Data

Eurozone government bond yields increased on Friday following data showing stronger-than-expected job gains in the U.S. This prompted a belief that the Federal Reserve is not likely to cut interest rates soon. The 10-year yields for Germany and Italy rose significantly, affecting the market outlook.

Euro zone government bond yields rose on Friday after data showed the U.S. economy added more jobs than expected in May, indicating the Federal Reserve should be in no rush to cut interest rates. Germany's 10-year yield was up 7 basis points at 2.62%, having extended early increases after the U.S. data. Italy's 10-year yield was 10 basis points higher at 3.96%.

That left both flat on the week. Prior to Friday's move Germayn's 10 year yield had been heading for its biggest weekly fall since March. Nonfarm payrollsincreased by 272,000 jobs last month, the U.S. Labor Department's Bureau of Labor Statistics said. Revisions showed 15,000 fewer jobs created in March and April combined than previously reported. Economists polled by Reuters had forecast payrolls advancing by 185,000.

This is a strong report, and it suggests that there are no signs of any cracks in the labour market," said Peter Cardillo, chief market economist, Spartan Capital Securities. "This report probably erases the hope of a September rate cut and pushes it back to maybe December."

The move came a day after the European Central Bank cut its main interest rates for the first time since 2019, though rate-setters warned on Friday that the final stage of pushing inflation down to 2% could be tough. Money markets were last pricing in little more than one further 25 basis point rate cut this year by the ECB, reducing slightly further bets on a third in the aftermath of the U.S. data.

Analysts highlighted that the ECB raised its inflation forecasts on Thursday and President Christine Lagarde provided few clues about the rate outlook. "There was a (an ECB) comment that, given the fall in inflation so far, rates are more restrictive than they were last September, so (yesterday's) cut was to remove some of this restriction," said Nick Chatters, fixed income manager at Aegon Asset Management.

"So all in all, the cut was hawkish at the margin for the market, as there was no further guidance," he added. Analysts also flagged a divided governing council, as a few conservative ECB policymakers expressed regret on Thursday about signalling too explicitly that a rate cut was coming and some even said they might have otherwise voted for holding rates.

Germany's 2-year government bond yield, more sensitive to policy rate expectations, was up 7 bps at 3.08%. It hit 3.125% on Friday, its highest since mid-November. The yield gap between Italian and German 10 year bonds , a gauge of the risk premium investors seek to hold bonds of the euro area's most indebted countries, widened to 133 bps. It hit a 15-month low at 115.4 bps in mid-March.

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