Euro zone bond yields drop on weak US jobs data

(Updates after US jobs data)

By Harry Robertson and Medha Singh

Nov 1 (Reuters) - Euro zone bond yields fell on Friday after data showed the U.S. labour market slowed sharply in October, bolstering market expectations for Federal Reserve rate cuts.

U.S. nonfarm payrolls grew by just 12,000 in October, in a month when hurricanes and strikes impacted the figures. That was down from a 223,000 rise in September and well below economists' expectations of a 113,000 increase.

U.S. short-dated bond yields, which are sensitive to interest rate expectations, fell sharply as investors nudged up their bets on Fed rate cuts.

Germany's 2-year bond yield followed suit, last down 6 basis points (bps) at 2.259%, having traded at 2.305% before the data. Yields move inversely to prices.

The size and importance of the U.S. economy and dollar means U.S. economic data moves markets around the world, and expectations about Fed policy spill over to other central banks.

Germany's 10-year bond yield was last down 3 bps at 2.359%, having stood flat at 2.389% previously. It was still set for a weekly rise of around 7 bps.

The monthly U.S. jobs figures showed the unemployment rate held steady at 4.1% in October, while average earnings growth was 4% year-on-year, also unchanged from the previous month.

"While the Fed will likely attribute some of the weakness in today's data to one-off factors, the softness...argues for the Fed to continue its easing cycle at next week's meeting," said Lindsay Rosner, head of multi sector fixed income investing at Goldman Sachs Asset Management.

The U.S. 2-year Treasury yield fell 8 bps to 4.084%, after hitting its highest level since the start of August earlier in the session.

U.S. yields have risen sharply in recent weeks, reflecting a run of strong economic data and rising market expectations that Republican former president Donald Trump will beat Democratic Vice President Kamala Harris in next Tuesday's election and implement inflationary tariff and tax policies.

European bond yields have also risen this week, driven by the rise in U.S. yields and a jump in UK borrowing costs in the wake of the new Labour government's budget, as well as stronger-than-expected euro zone inflation data for October.

Italy's 10-year bond yield was 2 bps lower at 3.646%, but up around 14 bps for the week. (Reporting by Harry Robertson in London and Medha Singh in Bengaluru; Editing by Kirsten Donovan)