MILAN: Euro zone government bond yields were down on Friday as expectations of European Central Bank support and worries about the economic recovery in Europe outweighed the impact of a bullish mood in US Treasuries yields.
US bond borrowing costs could be headed still higher after reaching 1% this week, on expectations a Democrat-controlled Congress will have the clout to pass more fiscal stimulus, bolstering economic activity and debt issuance.
A recent rise in yields and inflation expectations have bolstered Federal Reserve hopes its new monetary policy approach is taking hold and will be further buoyed if a Democratic-led Congress rolls out more spending.
Germany's benchmark 10-year Bund yield fell 1 basis point to -0.524%.
"European government bonds are not immune to the bearish US steepening, but the surge in the 30-year Treasury-Bund spread to above 200 basis points underlines the relative strength," Commerzbank analysts said in a research note.
Italy's 10-year government bond yields dropped 4 basis points after hitting their lowest level since mid-December at 0.485%. The spread between German and Italian 10-year bond yields tightened to around 100 basis points, its narrowest since 2016.
Investors shrugged off an ongoing clash between Prime Minister Giuseppe Conte and Italia Viva head Matteo Renzi, which has brought Italian political risks to the fore.
"With the ECB remaining strongly supportive, we do not expect a significant increase in nominal yields from the current levels in the coming months," Unicredit analysts said.
"That said, going forward, improving market sentiment is likely to drive eurozone yields, especially the real component, moderately higher," they added.
Investors will focus today on the US non-farm payrolls data, which are expected to suffer from the impact of coronavirus restrictions.
The US economy probably created the fewest jobs in seven months in December or even shed workers as the country buckled under COVID-19 infections.
"In the afternoon, the harsh realities could catch up with the upbeat reflation sentiment in the US when payrolls slip back to the lowest levels seen this spring," Commerzbank analysts added.
But analysts expect a Democratic sweep and President-elect Joe Biden's agenda will boost the US economy.
"Although historically narrow margins in Congress will restrain some of the more sweeping elements of the Biden agenda, this development will have substantial implications for the economic outlook, particularly in the near term," a Deutsche Bank research note said.