(Redesign, add details, update prices)
By Yoruk Bahceli
Aug 6 (Reuters) – German bond yields rose on Friday after stronger-than-expected US employment data for July, but the rise lagged US Treasuries, pushing the yield spread between 10-year bonds from countries at the widest point since June.
The data, which shows the non-farm payroll to rise by 943,000, above the 870,000 expected in a Reuters poll, is critical for bond markets as the job market will be crucial as the US Federal Reserve wonders when to start cutting back on bond purchases.
A good read was therefore seen as a catalyst that could push up government bond yields after their recent recession, which investors consider unwarranted given the expected economic recovery.
The German 10-year yield, the benchmark for the eurozone, rose more than 3 basis points (bps) to -0.46% at 1:20 p.m. GMT, the largest daily increase since June 17.
The weaker reaction of German bonds to Treasuries, where 10-year yields were up 7bp, pushed the spread between 10-year yields in the two markets up to 175bp, the widest since June.
“The ECB’s strategy review confirmed that the ECB’s outlook is 100% decoupled from the Fed’s outlook, meaning that the move towards (euro government bonds) is at low beta by in relation to the development of rates in USD “, said Andreas Steno Larsen, Global Director. strategist at Nordea.
The European Central Bank adopted a symmetrical inflation target of 2% in July, which will allow temporary overruns, and has pledged to keep rates low longer in order to meet the target.
The ECB’s revised strategy helped Germany outperform almost all major bond markets in July and helped keep bond yields subdued in August.
While 10-year Bund yields were expected to end the week unchanged, Treasury yields were set for their first weekly rise in six weeks.
Bond yields move in the opposite direction to prices.
The outperformance is expected to continue, with banks like JPMorgan and BofA expecting US Treasury yields to rise more than Bund yields by the end of the year.
Yields on 10-year Italian bonds – one of the main beneficiaries of ECB support – rose 4 basis points, their biggest daily jump since June 25.
However, the closely watched spread with German counterparts at around 103bp, from 108bp at the start of the week, is the biggest weekly tightening in five weeks. (Reporting by Yoruk Bahceli Additional reporting by Sujata Rao Editing by David Holmes and Mark Potter)