Euro zone bond yields dip after US jobs data; French risk premium falls

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. The closely watched gap between French and German bond yields also narrowed as investors spied some glimmers of hope about a potential budget being passed despite a political crisis.

Germany's 10-year bond yield was last very slightly higher at 2.109%, 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.

"Today's payroll report reinforces the case for a Fed cut in December, but without inciting any meaningful worries about the labour market," said Seema Shah, chief global strategist at Principal Asset Management. "Labour demand is slowing, as evidenced by the rise in unemployment rate and the surprisingly limited revisions from weather and strike effects last month."

Italy's 10-year bond yield was last flat at 3.197%, from 3.205% before the data. France's 10-year yield was down 2 basis points (bps) at 2.868%, also dipping slightly. In the morning session in Europe, the 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.

Michel Barnier, a veteran conservative, became the shortest-serving prime minister in modern French history when he resigned on Thursday after parliament voted him out over his fiscal plans, barely three months after he was appointed. But 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, soothing some investors' concerns over the country's burgeoning deficit.

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 2 bps at 77 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.

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 1 bp lower at 109 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.

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