© Reuters. FILE PHOTO: The euro sign is photographed in front of the former head quarter of the European Central Bank in Frankfurt, Germany, April 9, 2019. Picture is taken on slow shutter speed while the camera was moved. REUTERS/Kai Pfaffenbach/File Photo
By Yoruk Bahceli
(Reuters) – Germany’s bond yields rose on Friday after stronger than expected U.S. jobs data for July, but the rise lagged U.S. Treasuries, pushing the yield gap between the countries’ 10-year bonds to the widest since June.
The data, which showed non-farm payrolls increase by 943,000, above the 870,000 expected in a Reuters poll, is key to bond markets as the labour market will be crucial as the U.S. Federal Reserve weighs when to start tapering its bond buying.
A strong reading has therefore been seen as a catalyst that could drive government bond yields higher from their recent slump, which investors say is unjustified given the economic recovery expected.
Germany’s 10-year yield, the benchmark for the euro area was up over 3 basis points (bps) to -0.46% by 1320 GMT, set for the biggest daily rise since June 17.
The smaller reaction from German bonds relative to Treasuries, where 10-year yields were up 7 bps, pushed the gap between 10-year yields in the two markets to as high as 175 bps, the widest since June.
“The ECB strategy review has cemented that the ECB outlook is 100% decoupled from the Fed outlook, which means that the move in (euro government bonds) is low-beta to the development in USD rates,” said Andreas Steno Larsen, global chief strategist at Nordea.
The European Central Bank adopted a symmetric 2% inflation target in July, which will allow for temporary overshoots, and pledged to keep rates lower for longer in order to meet the target.
The ECB’s revised strategy helped Germany outperform almost all major bond markets in July and has helped keep bond yields subdued in August.
While 10-year Bund yields were set to end the week unchanged, Treasury yields were set for their first weekly rise in six weeks.
Bond yields move inversely with prices.
The outperformance is expected to continue with banks like JPMorgan (NYSE:) and BofA expecting U.S. Treasury yields to rise more than Bund yields by the end of the year.
Yields on 10-year Italian bonds – a key beneficiary of ECB support – were 4 bps higher, set for their biggest daily jump since June 25.
However, the closely watched gap with German equivalents at around 103 bps, down from 108 bps at the start of the week, is the biggest weekly tightening in five weeks.
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