LONDON: German yields held around seven-week highs on Friday, before a report on US jobs that could help the Federal Reserve to decide when it will start trimming its monetary stimulus.
Euro zone bonds weakened this week as healthy US economic data raised expectations the Fed will start cutting back bond purchases sooner rather than later, and as the European Central Bank showed no hints that further monetary easing was imminent.
Bonds edged up briefly after German industrial orders posted their biggest decline in nearly a year in October, but the market remained edgy before the US labour market numbers.
Recent data showed the US economy grew faster than first reported in the third quarter and unemployment claims unexpectedly fell last week.
That fuelled bets the Fed could start rowing back on its stimulus as early as January.
As a result, investors are particularly sensitive to the US non-farm payrolls report due later on Friday, which could bear on the Fed's policy stance when it meets on Dec. 17-18.
The comprehensive labour market report is expected to show employers added 180,000 jobs in November, according to the median estimate of 90 economists polled by Reuters.
"The market is braced for a strongish report. The risks to me seem skewed ... there seems to be more room on the downside for yields than there is on the upside," said Philip Tyson, a strategist at ICAP.
"It has to be a quite strong number for yields to rise further. It will have to be around the 250,000 mark.
The market is expecting a number around 200,000."
German 10-year yields were steady at 1.86 percent, their highest since Oct. 18. Bund futures were 2 ticks lower at 139.87, on track for their biggest one-week fall since mid-August.
REASSESSMENT
Bund yields have closely tracked US benchmarks this week, which hit three-month peaks around 2.879 percent as investors reassessed the outlook for the Fed's stimulus.
A growing number of analysts think the Fed will start scaling back its $85 billion-a-month in bond purchases earlier than March, which had previously been expected. Some see an announcement as early as the Fed's meeting this December.
For BNP Paribas strategists, the rise in German 10-year yields looked "very aggressive" given the subdued growth and inflation outlook in the euro zone.
"The 10-year benchmark yield is surging out of its recent range. We see room for at least a stabilisation and at best a rally in coming days," they said.
"However, it remains exposed to selling pressures coming from the US today. So we are cautious ahead of today's figures, but recommend rather a long duration exposure after the recent rise in yields."
Spanish 10-year yields were 4 basis points lower at 4.24 percent.
The Italian equivalents were down 3 bps at 4.23 percent. Some in the market were buying back into the bonds after Thursday's sell-off.
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