LONDON: Euro zone government bond yields held just above record lows on Friday before a U.S. labour market report that is expected to reconfirm the yawning gap between the two regions and their monetary policy outlooks.
Expectations that the European Central Bank will soon launch a large-scale government bond purchase programme to reverse a fall in consumer prices and boost a stagnant economy have virtually erased yields across the single currency bloc.
About a quarter of the euro zone bond market is now yielding less than 10 basis points. German bonds with maturities of up to five years are yielding zero or less. Ten-year Bund yields , which set the standard for the bloc's borrowing costs, were 0.51 percent, about 8 bps above record lows.
A stronger U.S. economy and expectations the Federal Reserve will raise rates this year are widening the spread between yields on either side of the Atlantic. However, low euro zone yields are preventing a bigger sell-off in U.S. Treasuries.
U.S. 10-year T-note yields were 149 bps higher than Bund yields at 2 percent. At the end of last year, the U.S/Germany yield gap was the widest since 1999 at 167 basis points.
U.S. employers were expected to have added 240,000 jobs to their payrolls last month in what should be the 11th consecutive month of job gains above 200,000 -- the longest stretch since 1994.
"Markets abide U.S. labour market figures," said Commerzbank analyst Markus Koch. "Do not miss out on buying U.S. Treasuries versus short 10-year Bunds at current levels, targeting a re-widening to 155 basis points-plus in the wake of the report."
Chris Iggo, head of fixed income for Europe and Asia at AXA Investment Managers, expected U.S. yields to climb further.
"But I am now not convinced that we will see yields rise to levels that are consistent with the longer term economic outlook ... above 4 percent," he said.
"For that to happen, I think we would need to see an end to QE as a policy, which is unlikely given the Japanese and European position and the unwillingness of the Fed and the Bank of England to shrink their balance sheets just yet."
Euro zone members Germany, Malta, the Netherlands, Lithuania and Portugal could see their credit ratings altered on Friday. EU rules require ratings agencies in Europe to publish the dates when they will review a country.
Yields on lower-rated bonds were flat to slightly lower to slightly higher, with Spain's 10-year paper yielding 1.71 percent, Italy's 1.86 percent and Portugal's 2.64 percent.
"We are now nearly sure the ECB will buy sovereign bonds," said Cyril Regnat, fixed income strategist at Natixis.
"Every widening is a buying opportunity in the periphery."
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