Euro zone bond yields fall, Moody’s cut Italy’s ratings outlook

LONDON, Aug 8 (Reuters) – Euro zone bond yields fell on Monday, having risen sharply after stronger-than-expected U.S. jobs data at the end of last week, while Italian bonds faced some mild selling pressure after Moody’s lowered Italy’s ratings outlook.

Safe-haven bonds drew some support from geopolitical tensions although analysts warned against reading too much into market moves given thin summer trading conditions.

China’s military announced fresh drills on Monday in the seas and airspace around Taiwan – a day after the scheduled end of its largest ever exercises to protest last week’s visit to Taipei by U.S. House Speaker Nancy Pelosi.

Germany’s 10-year Bund yield was down 6 bps at 0.89%, while French and Dutch 10-year yields were down around 5-6 bps each.

German bond yields rose 15 bps on Friday in their biggest one-day surge since March 2020, after data showed the U.S. economy created 528,000 new jobs in July.

That number stoked expectations for a supersized September U.S. rate hike and pushed up Treasury yields 10-22 basis points (bps).

“It’s a slight reversal of Friday’s move but bear in mind that the next two weeks will be a thin trading environment,” said Mizuho rates strategist Peter McCallum, explaining the fall in euro zone bond yields.

A rise in U.S. interest rate-hike bets for September meanwhile boosted bets for another big rate rise from the European Central Bank next month.

Money markets now price in about a 90% chance of a 50 bps rate rise from the ECB in September, versus a roughly 50% chance a week ago.

Investor morale in the euro zone was essentially unchanged in August from the previous month, with a slight rise too little to stave off recession fears, a survey showed.

Italian bonds underperformed their peers, with 10-year yields around 2 bps higher on the day at 3.04%.

Italy’s closely watched bond-yield gap over Germany was around 213 bps, versus 205 bps late on Friday.

Ratings agency Moody’s cut Italy’s outlook to “negative” from “stable” on Friday, weeks after Prime Minister Mario Draghi’s resignation sparked fresh political uncertainty.

Moody’s said risks to Italy’s credit profile had risen due to political developments and the economic fallout of Russia’s invasion of Ukraine.

S&P Global last month cut its ratings outlook to stable from positive.

“The same rating action by S&P the other week already prepared markets for a less dovish rating dynamics but failed to cause lasting pressure,” said Michael Leister, head of interest rates strategy at Commerzbank.

Data last week showing the ECB had skewed reinvestments from maturing bonds from its PEPP stimulus scheme to Italy was expected to bolster Italian debt.

(Reporting by Dhara Ranasinghe; Editing by Susan Fenton and Emelia Sithole-Matarise)