Euro zone bond yields near two-month highs ahead of US jobs data

Sept 2 (Reuters) – Euro zone bond yields held near two-month highs on Friday ahead of US jobs data that kept market focus squarely on inflation.

A Reuters poll expects the US economy will have added 300,000 jobs in August, down from the 528,000 in July that had come as an upward surprise, and a slight decline in average earnings on a monthly basis.

“The market’s probably expecting a fairly strong set of labour market numbers from the data we already have out this week,” said Peter McCallum, rates strategist at Mizuho in London.

US money markets currently price in over a 70% chance of a 75 bps Fed move this month. Another strong labour market print would cement expectations for the 75 bps move.

In the euro zone, bond yields edged lower from two-month highs reached on Thursday. Germany’s 10-year yield, the benchmark for the bloc, was up around 2 basis points (bps) to 1.59%, after rising to 1.63% on Thursday, the highest since end-June.

“I think we’re going to be range-bound in outright yields until the ECB meeting,” McCallum at Mizuho said.

“In Europe it’s more a story about the market viewing things as more fairly priced given how much has been factored in for the ECB meeting,” he added.

Italy’s 10-year yield was up 6 bps to 3.94%, after a brief rise above 4% on Thursday.

The closely-watched spread to German peers was at 235 bps, after rising to 243 bps on Thursday, when it neared levels at which the ECB first promised its new tool, now called the Transmission Protection Instrument, to contain large divergences between member states’ borrowing costs it sees as unwarranted. 

The bloc’s bond yields have delivered a third week of sharp rises this week as investors sharply raised their bets on a large 75 bps rate hike from the ECB at its policy meeting next Thursday following hawkish rhetoric from policymakers and another higher-than-expected rise in August inflation.

Money markets price in around an 80% chance of a 75 bps hike at the meeting, levels similar to Thursday, according to Refinitiv data, compared to less than 50% last Friday.

BNP Paribas became the latest bank to revise its call for a 75 bps move next week.

(Reporting by Yoruk Bahceli; Editing by Angus MacSwan)