Euro zone bonds yields claim 3-month highs in volatile session

LONDON: Euro zone bond yields rose to three-month highs on Friday in a volatile session in which investors took the view that disappointing US jobs data wouldn't derail expectations for the Federal Reserve to proceed with its stimulus tapering plans.

The monthly non-farm payrolls report showed US job growth slowed sharply and the economy added less than half the jobs analysts expected in September.

But after an initial drop, the US benchmark 10-year yield surged to its highest level since June at 1.608%, lifting its counterparts in the euro zone.

Having risen as high as -0.147%, a level also hit earlier this week, Germany's 10-year bond yield briefly dipped to -0.185% before reclaiming session highs.

At 1500 GMT, the benchmark for the euro area was up 3.8 basis point on the day.

US Federal Reserve chairman Jerome Powell said at the bank's September policy meeting that a "reasonably good" employment report would meet the bank's threshold for reducing its bond purchases.

"There's less need for the market to get concerned about a quick pace of hikes from the Fed," said Mizuho strategist Peter McCallum, who nonetheless still expects the Fed to start tapering its bond purchases in November.

The US Senate approved legislation on Thursday to temporarily raise the federal government's $28.4 trillion debt limit and avoid the risk of a default this month. But it put off a decision on a longer-term remedy until early December.

In the euro area, investors brought forward ECB rate hike bets alongside those on other central banks like the Fed and the Bank of England in recent weeks. Money markets now price a greater than 60% chance of a 10-bps ECB rate hike in December 2022.

"The market is pricing too high of a possibility of a rate hike in Europe over the near term," said Nick Sanders, portfolio manager at Alliance Bernstein.

"The ECB have been clear that their inflation forecast over the medium term is still going to be below their target." On Friday, ECB President Christine Lagarde said the euro zone economic recovery is facing frictions and imbalances, like rising energy prices and supply chain disruptions, that could hold it back and last beyond the end of the pandemic.