German yields stabilise after previous session rally; US payrolls in focus

LONDON: German government bonds stabilised on Friday, having rallied the day before on the back of a sell-off in tech stocks and a survey showing the euro zone's rebound from its deepest downturn on record faltered in August.

Traders will be watching for the US payroll data later in the day for confirmation of whether the US economy is indeed in trouble after Wednesday's disappointing ADP report, which tends to act as a predictor for the official release on Friday.

"A disappointment in today's US jobs report could add to the gloom, but after the recent vicious moves a lot may be baked into the cake already," said ING analysts in a note to clients.

Economists polled by Reuters expect 1.4 million jobs to have been added in August, less than 1.8 million the months before. The unemployment rate, though, is expected to fall to 10.1% from 10.9%.

Euro zone yields were not bothered by the fact that orders for German industrial goods rose by a weaker-than-expected 2.8% in July, indicating an initial snap back from the coronavirus shock is fading into a slower recovery in Europe's largest economy.

Two European Central Bank monetary policy committee members - François Villeroy de Galhau and Philip Lane - are due to speak on Friday, ahead of the ECB meeting next week during which analysts foresee more stimulus being added through the pandemic emergency purchase programme (PEPP).

"If the added stimulus were indeed to materialise in the form of an expanded PEPP envelope, that would be welcome news given that even Germany now plans at least 80 billion euros of new debt next year," ING analysts said.

German 10-year benchmark yield last traded neutral at -0.48% , having fallen on Thursday to a 1-1/2-week low of -0.50%. Two-year yields were also flat at -0.69% after touching a one-month low of -0.71% the day before.

Italian 10-year yields fell 1.4 bps to 1.04%.