LONDON: German Bund futures rose on Friday as investors looking for insight into the Federal Reserve's policy outlook positioned for weaker-than-forecast US jobs data.
Euro zone bonds broadly recovered from losses made on Thursday after comments by European Central Bank President Mario Draghi fuelled concerns over the future of global monetary stimulus, but bonds of more vulnerable states underperformed.
Market participants said the main risk was that the data undershoots expectations. According to a Reuters survey, 170,000 jobs were added in May though a private sector employment report this week came in below forecast.
September Bund futures rose 63 ticks to 144.08. The June contract expired on Thursday.
Markets have become particularly sensitive to US data on concerns the Fed may soon begin scaling back its bond purchases. The central bank has said it will keep buying assets until it sees a significant improvement in the labour market.
"I think we have got to see (payrolls) numbers above 200,000 on a consistent basis to start really unnerving markets" regarding the possibility of Fed tapering, one trader said. But he expected the payrolls report to be weak.
Euro zone bonds fell sharply on Thursday when Draghi gave no hints that further monetary easing was imminent.
"The market probably over-reacted yesterday because the market interpreted Draghi's comments as less dovish than expected but, in the end, they still left open the possibility to act further if the data worsens," Alessandro Giansanti, senior rates strategist at ING in Amsterdam, said.
After holding its main interest rate at a record low 0.5 percent, the ECB said it discussed cutting its deposit rate to below zero but would keep this and other unconventional options "on the shelf" for now.
Highly-rated French, Dutch and Austrian bond prices rose. Ten-year French yields fell 2.8 basis points to 2.10 percent, Dutch yields were 4 bps lower at 1.86 percent and Austrian borrowing costs were 3 bps lower at 1.75 percent.
Lower-rated debt underperformed, with Spanish and Italian 10-year bonds, which gained strongly on Thursday, little changed on the day and Irish and Portuguese debt under selling pressure.
But ICAP strategist Philip Tyson said lower-rated debt could come under further selling pressure over the longer term.
Just as the ECB's bond-buying programme remains untested, the prospect of negative deposit rates seemed some way off given internal disagreements within the ECB, he said.
"I am wondering if the market is seeing through the verbal support and needs to see something more solid," he said.
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