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German government bond yields were set for their biggest weekly drop since June 2020 on Friday as investors scaled back their aggressive bets for future interest rate hikes following dovish moves by the Federal Reserve and the Bank of England (BoE).

Bund yields dropped to their lowest levels in a month and peripheral borrowing costs plunged on Thursday after the Bank of England kept its interest rates on hold.

Fed Chair Jerome Powell's remarks signalled the day before the central bank would stay patient before raising interest rates.

Germany's 10-year Bund yield, the benchmark of the bloc, was down 1.5 basis points after hitting its lowest level since September 2021. It was set for its biggest weekly fall since June 2020.

"Even after yesterday's adjustment, however, money markets are still discounting substantial tightening for next year," Commerzbank analysts told clients.

"This holds particularly true for the ECB given that current levels of Harmonised Index of Consumer Prices (HICP) forwards still do not meet the ECB's first two of its three conditions for lift-off next year," they added.

ECB Vice President Luis de Guindos said on Friday euro zone inflation is still expected to fall next year as the factors driving it remain temporary but the rate of its decline will be slower than earlier seen.

Italy's 10-year government bond yield were flat at 0.94%, but was set for its biggest weekly fall since May 2020.

Investors were focusing on US October non-farm payrolls data as Powell reiterated on Thursday that more job growth was needed before the central bank raised interest rates.

Still, some analysts sounded sceptical about a possible strong market reaction.

"A re-emergent theme of US versus eurozone rates divergence could get a push from US jobs data that are expected to rebound today," ING analysts said.

"As before, the data is also likely to be littered with inflation risks given constrained labour supply, although that is something central bankers continue to play down as transitory," they added.

But according to Deutsche Bank analysts, "at one level, it would seem that 'Payrolls Friday' will lose even more of its lustre as a market mover now that the Fed taper decision has been made, and a funds rate hike is widely seen as deferred until at least the middle of next year."

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