LONDON: German bond yields edged higher on Friday as investors bet that an expected rebound in US employment in September will hasten monetary tightening in the world's biggest economy.
With little immediate prospect of a European Central Bank government bond-buying scheme, European strategists believe a strong US non-farm payrolls figure for September, due at 1230 GMT, will send yields up further. "It all depends on the US payroll number, where we see some risk on the upside of the outcome," said Piet Lammens, strategist at KBC.
"It's not so much the payrolls themselves, but how the market reacts. This might give us more clues about what might happen in the next weeks."
A Reuters poll of economists forecast a rise of 215,000 in non-farm payrolls last month, a big jump from August.
Strong economic data will be needed to convince the US Federal Reserve to begin raising interest rates after it winds up its massive stimulus programme later this month. German 10-year yields opened 1 basis point higher at 0.93 percent, pulling away from lows of 0.87 percent hit at the end of last month.
Lammens said yields could rise as high as 1.12 percent in the coming weeks.
This all points to what could be a rocky road for financial markets in the fourth quarter. "Simply put when the central banks step away from dampening risk, investors need to be compensated by higher yields," said Chris Iggo, chief investment officer for fixed income at AXA Investment Managers.
PERIPHERY PRESSURE ABATES
Elsewhere, the sell-off that struck weak euro zone government bonds after Thursday's ECB meeting appears to have arrested. Italian and Spanish yields - the bellwether for the so-called peripheral countries - dipped 1 bp and 3 bps lower, respectively, at 2.32 and 2.10 percent. Weaker-than-expected services data from both countries, dragged down business growth in the euro area to a ten-month low, lends further weight to calls for future ECB easing. Business activity in Italy's service sector shrank in September for a second month in a row, as new business continued to contract, a survey showed on Friday.
"The Italian PMI surveys provided little by way of positive take-aways this month there should be no mistake that the risks are now tilted towards a further decline," said RBC's European economist Timo del Carpio.
Spain's services sector remains comfortably in expansionary territory, but data on Friday showed this slowing as growth in new orders fell to an 11-month low.
Credit Agricole's European head of fixed income, Luca Jellinek, said strong US growth data should be positive for exporters like Spain and Italy even if a near-term rise in US Treasury yields were to import some temporary jitters.
While the ECB may be in policy limbo as it waits for existing measures to take effect, KBC's Lammens said its accommodative stance should cushion the blow for euro zone securities from any US-imported weakness.
While the ECB kept silent on the prospect of buying sovereign debt on Thursday, it outlined a plan to buy rebundled packets of debt even from some of the bloc's weakest states.
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