LONDON: Euro zone government bond yields dipped as a trade dispute between the US and China flared up again, and they could fall further if US jobs data due later on Friday falls short of expectations.
Government bonds in major developed economies, considered a safe investment in uncertain times, have seesawed this week as US President Donald Trump wrangles with Beijing over tariffs, raising prospects of a full-blown trade war between the world's two largest economies.
An apparent easing in tensions earlier in the week pushed euro zone yields higher as investors shed safe-haven assets, but that move reversed on Friday after Trump directed US trade officials to identify options for tariffs on $100 billion more of Chinese imports.
The yield on 10-year German government debt, the euro zone benchmark, dipped 2 basis points in early trade to a shade below 0.51 percent, erasing much of Thursday's rise.
"Yesterday yields were rising on hopes that China and the US will find a solution, but with the change in sentiment, yields are retracting," said DZ Bank strategist Sebastian Fellechner.
"But the bigger picture is that the market is pricing in trade tensions, if you look at where Bund yields are now."
Persistently low inflation readings and a scaling back of high investor expectations for European economic growth are also fuelling demand for euro zone bonds.
German 10-year yields are about 30 basis points below the high they reached in February, and most other euro zone yields are also similarly far below equivalent highs, hit on expectations of policy tightening by the European Central Bank.
US employment figures due later could change the short-term trajectory of the market, said Fellechner of DZ Bank. As of now, expectations are the 193,000 jobs to be added, according to a Reuters poll.
Any reading above that headline figure could strengthen the case for rate hikes and push US Treasury yields, as well as European equivalents, higher.
The yield on 10-year US Treasuries was 1.5 bps lower at 2.815 percent in European trade, and the gap over the German equivalent was at 230 bps, just a few basis points below the one-year high hit in March.
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