LONDON: Southern European bond yields hit three-month lows on Thursday, in line with broader market optimism as employment data provided signs of economic respite.
Euro zone joblessness edged up only slightly and by less than expected in May as lockdowns gradually eased, while the US economy created a record 4.8 million jobs in June as more restaurants and bars resumed operations.
Italian bonds outperformed, with 10-year yields seeing their biggest daily fall in three weeks, down 6 basis points to 1.28%, the lowest since March 27. Their Portuguese equivalent hit their lowest since March 12 .
Germany's 10-year Bund yield retraced some of its rise after a hefty sell-off a day earlier, and was down 3 basis points in late trade to -0.44%.
It had risen above -0.40% for the first time in a week on Wednesday, in its biggest daily jump in a month, as an improvement in euro zone manufacturing data boosted investors' risk appetite.
Rainer Guntermann, a rates strategist at Commerzbank, wrote in a note to clients that although the data might have been the catalyst for Wednesday's sell-off in safe-haven government debt, month-end flows and hedging of corporate bond issuance were also possible factors.
Bank of America strategists wrote in a note to clients that they were concerned the market was pricing in too much progress on an EU-wide recovery fund proposal ahead of a summit later this month.
The Dutch prime minister has said a compromise on the highly-anticipated fund is possible, but negotiations will be tough.
"Although the European authorities have a strong ability to oversell such decisions, we see risks that the details and actual implementation could disappoint," BoA wrote.
In the primary market, France sold the top amount in a bond auction, raising 11.75 billion euros ($13.26 billion) of long-dated debt.
The European Central Bank's chief economist, Philip Lane, signalled a pause in policy action in an interview on Wednesday. He said that the ECB did not target any particular spread levels between the yields of euro zone members, and it was "absolutely not" into yield targeting.
This "keeps ECB expectations in check - similar to last October when ECB easing fatigue loomed large following a comparable communication shift", Commerzbank's Guntermann said.
US Federal Reserve policymakers also appear sceptical of yield curve control, alternately described as a "target" or "cap" in the Fed's minutes released on Wednesday.