Euro zone bond yields jump as U.S. jobs growth surges

(Updates after U.S. jobs data)

By Harry Robertson and Stefano Rebaudo

Oct 4 (Reuters) -

Euro zone bond yields leapt on Friday after data showed U.S. jobs growth was stronger than expected in September, weakening the case for further outsized interest rate cuts from the Federal Reserve.

Data showed

U.S. nonfarm payrolls rose by 254,000 in September, compared to 159,000 in August, well above economists' expectations of a 140,000 increase.

Germany's two-year yield was last up 10 basis points (bps) at 2.175%, having stood 7 bps higher at 2.139% before the U.S. data.

The yield, which is particularly sensitive to European Central Bank interest rate expectations, fell to 1.987% on Tuesday, its lowest level since December 2022, in the wake of weak

euro zone inflation

data. Yields move inversely to prices.

Yet it has rebounded since then as data has suggested the U.S. economy remains strong and as oil prices have jumped on the back of the widening of conflict in the

Middle East

.

"Today's jobs figures suggest the Fed's action is working well to support its full-employment mandate," said Richard Flynn, managing director at Charles Schwab UK.

"With high inflation largely in the rear-view mirror, this could be less good news for markets, as it may slow the pace of future rate cuts."

The size and important of the U.S. economy and dollar mean they tend to impact bond markets and central banks around the world.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, was last up 8 bps at 2.219%, around its highest since mid-September. It hit 2.011% on Tuesday, its lowest level since January.

Traders in money markets slightly trimmed their bets on ECB rate cuts after the data, which showed the U.S. unemployment rate unexpectedly dipped to 4.1% last month.

They last saw an 80% chance of another ECB rate cut in October, down from around 85% earlier in the day.

Oil prices - one of the main drivers of consumer inflation - were subdued on Friday, but remained on track for strong weekly gains, as investors weighed the prospect of a wider Middle East conflict disrupting crude flows.

U.S. President Joe Biden said he did not believe there would be an "all-out war" in the Middle East, after flagging on Thursday that Israel's response could include a strike on Iran's oil facilities.

Italy's 10-year yield rose 5 bps to 3.53% while the gap between Italian and German yields tightened to 130 bps.

(Reporting by Harry Robertson and Stefano Rebaudo, Editing by Hugh Lawson and Gareth Jones)