LONDON: German borrowing costs fell on Friday as investors' faith in a near-term US rate hike was dented by a mixed US jobs report while a retreat in oil prices helped dispel deflation fears that have been behind a recent bond rout.
U.S and European benchmark bond yields dropped sharply after a report showed US jobs gains were weaker than initially thought in March, even though they rebounded last month.
Traders pared expectations that the first rate hike from the US Federal Reserve will come in December to 51 percent from 62 percent after the data, futures contracts showed. Strategists said the revision, in conjunction with oil prices marking their first weekly decline in more than a month and a British election that resulted in an unexpected majority Conservative government, brought relief to markets that had been rattled over the past 10 days.
"The net revisions in the US jobs data were a mild disappointment, but part of the fall in yields today has simply been because they have been oversold," said Jonathan Rick, a strategist at Credit Agricole in New York.
German 10-year Bund yields, which set the standard for euro zone borrowing costs, were 6 basis points lower on the day at 0.54 percent, having risen to nearly 0.80 percent on Thursday.
Having been on track for their biggest two-week rise in more than a decade on Thursday, Friday's dip means the climb of some 18 bps this week will not match a jump of 21 bps last week.
They remain, however, a good distance from the record low of 0.05 percent hit last month.
The jump, triggered last week by better-than-expected German price growth data at the end of April, also comes after a 40 percent rise in oil prices since January.
This could prove a testing backdrop for a sale of 10-year German debt at auction next Thursday.
The European Central Bank's preferred measure of the market's long-term inflation expectations, the five-year, five-year breakeven forward -- which measures where the market expects 2025 inflation forecasts to be in 2020 -- rose to levels it stood at prior to the start of the European Central Bank's bond-buying programme, hitting 1.80 percent on Thursday.
The dip in oil prices brought the measure back to 1.78 percent on Friday, but it was still well above levels of less than 1.50 percent at the start of the year, when markets were fearing a prolonged period of deflation.
While the rout in bond markets has tempered, the volatility might make investors wary of re-testing record low yields in the near future.
"It's a wake-up call that it is not a one-direction market, and there can still be strong moves," said Michiel de Bruin, co-manager of F&C Macro Global Bond Fund. All other euro zone bond yields fell on the day.
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