Euro zone bond yields near two-month highs ahead of U.S. jobs data


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Euro zone bond yields were near two-month highs on Friday ahead of U.S. jobs data that kept market focus squarely on inflation.

A Reuters poll expects the U.S. economy will have added 300,000 jobs in August, still a strong pace though down from the 528,000 in July that had come as an upward surprise.

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“The market’s probably expecting a fairly strong set of labor market numbers from the data we already have out this week,” said Peter McCallum, rates strategist at Mizuho in London.

U.S. money markets currently price in over a 70% chance of a 75 basis-point (bps) Fed move this month. Another strong labor market print would cement expectations for the 75 bps move.

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In the euro zone, bond yields rose on Friday, keeping close to highs breached on Thursday. Germany’s 10-year yield, the benchmark for the euro area, was up around 3 bps to 1.60% by 1035 GMT, having risen to 1.63% on Thursday, the highest since end-June.

The bloc’s bond yields have delivered a third week of sharp rises this week. Investors have sharply raised their bets on a large 75 bps rate hike from the ECB at its policy meeting next Thursday following hawkish rhetoric from policymakers and another higher-than-expected rise to a new record high in August inflation.

“I think we’re going to be range-bound in outright yields until the ECB meeting,” McCallum at Mizuho said.

“In Europe it’s more a story about the market viewing things as more fairly priced given how much has been factored in for the ECB meeting,” he added.

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Money markets price in over an 80% chance of a 75 bps hike at the meeting, levels similar to Thursday, according to Refinitiv data, compared to less than 50% last Friday. That has pushed Germany’s 10-year yield up 20 bps this week.

Italy’s 10-year yield was unchanged at 3.94%, after a brief rise above 4% on Thursday.

The closely-watched spread to German peers was at 234 bps, after rising to 243 bps on Thursday, when it neared levels at which the ECB first promised its new tool, now called the Transmission Protection Instrument, to contain large divergences between member states’ borrowing costs it sees as unwarranted.

BNP Paribas became the latest bank to revise its call for a 75 bps move next week.

(Reporting by Yoruk Bahceli; Editing by Angus MacSwan and Raissa Kasolowsky)

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