European government bonds set for weekly gain

BY Reuters | TREASURY | 12/02/22 04:05 AM EST

By Alun John

LONDON, Dec 2 (Reuters) - European government bonds on Friday were set to post weekly gains having rallied in the slipstream of advances in U.S. Treasuries, although U.S. jobs data due later in the day could disturb the trend.

Germany's 10-year bund yield, the benchmark for the euro zone, was last at 1.79%, little changed on the day, but at its lowest since early October and down nearly 18 basis points on the week.

Italy's 10-year bond yield was at 3.68%, also steady on the day and set for a 15-basis-point weekly decline.

Bond yields move inversely to prices.

The rally in government bonds was driven by hopes the Federal Reserve will move away from its aggressive pace of interest rate hikes, sparked by a dovish speech by Federal Reserve chair Jerome Powell on Wednesday - as well as U.S. data on Thursday that raised concerns about slowing economic growth while also indicating a slowdown in inflation.

"This environment proved a great backdrop for Treasuries," Deutsche Bank strategist Jim Reid said in a daily note, while "back in Europe, sovereign bonds rallied alongside U.S. Treasuries as investors caught up with Chair Powell's speech and priced in a more dovish outcome for the ECB as well."

U.S. benchmark 10-year yields have fallen 17 basis points this week.

Traders were also watching U.S. payrolls data due later on Friday to see whether this would do anything to disrupt the narrative of slowing economic growth.

Analysts expect the data to show U.S. November job growth was the smallest in nearly two years.

Shorter dated European government bonds also rallied. The German two-year yield was two basis points lower at 2.0% and the Italian two-year yield was 3 basis points lower at 2.5%.

The closely watched spread between Italian and German 10-year yields was 187 basis points. DE10IT10=RR (Reporting by Alun John Editing by Mark Heinrich)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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