Euro zone bond yields dip after US jobs data keeps Fed on cutting path

Euro zone government bond yields dipped on Friday after data showed the U.S. jobs market performed better than expected in November, but kept the Federal Reserve on track to cut rates in December.

Euro zone government bond yields dipped on Friday after data showed the U.S. jobs market performed better than expected in November, but kept the Federal Reserve on track to cut rates in December. Germany's 10-year bond yield was last up 1 basis point (bp) at 2.117%, having traded at 2.123% before the data was released.

The U.S. economy added 227,000 jobs in November, data showed, up from 36,000 in October and above economists' expectations of a 200,000 gain. Yet the unemployment rate ticked up to 4.2%, from 4.1% in October.

U.S. bond yields, which set the tone for government yields around the world due to the importance of the U.S. economy, slipped after the data as investors moved to price in a slightly quicker pace of Fed rate cuts. Italy's 10-year bond yield was last flat at 3.196%, from 3.205% before the data. France's 10-year yield was down 1 bp at 2.881%, also dipping slightly.

In the morning session in Europe, the closely watched spread between French and German borrowing costs had narrowed as hopes grew that France may end up with a 2025 budget approved by parliament, while the prospect of European Union joint funding fuelled broader convergence among yields. French President Emmanuel Macron said he would appoint a new prime minister in the coming days, and his top priority would be getting a 2025 budget adopted by parliament.

The gap between French and German yields – a gauge of the risk premium investors demand to hold French debt – hit 72.40 bps, its lowest since Nov. 21. It was last down 3 bps at 75.6 bps. Far-right National Rally leader Marine Le Pen, who voted to oust Barnier, said on Thursday that a budget could be passed within weeks.

"Her comments suggest the political deadlock may not be as stuck as suggested over the past few days," said Michiel Tukker, senior European rate strategist at ING. The spread between Italian BTP yields and German Bund yields dropped to 105 bps on Friday, its lowest level since Oct. 2021. It was last down 2 bps at 107.7 bps.

Analysts pointed to a Financial Times report that EU countries are discussing a 500 billion euro joint fund for common defence projects and arms procurement. "BTPs are taking another major leap as prospects of more joint funding on the European level for defence is boosting the convergence trade," said Michael Leister, head of interest rates strategy at Commerzbank.

Markets await a European Central Bank policy meeting next week where a rate cut is expected.