Euro zone yields dip in line with Treasuries, traders eye German, US politics

(Updates at 1140 GMT)

By Alun John

LONDON, Nov 8 (Reuters) - Euro zone bond yields moved lower on Friday, at the end of a busy period in which they had to digest major central bank meetings, the U.S. election and the collapse of the German government, and which has left them near flat on the week.

Germany's 10-year yield, the benchmark for the euro zone, was last down 5 basis points at 2.39%, after a volatile few days as investors try to assess the ramifications of recent developments.

The election of Donald Trump as U.S. president initially caused a sharp rise in U.S. Treasury yields, on the one hand potentially putting upward pressure on European yields, which often move in sympathy with their U.S. peers, but, on the other, potentially pushing euro zone yields down on expectations U.S. tariffs on Europe could see a faster pace of ECB rate cuts.

Also in the mix has been the collapse of the German government, and pressure for an early election.

This could drive investors to German government bonds given their safe haven status and push yields down, or, alternatively, if a new government is able to increase spending and boost economic growth, it could send yields higher.

"There are a lot of dynamics all playing at the same time," said Michiel Tukker, senior European rate strategist at ING.

"Just looking at today, we see again that the correlation is quite strong between U.S. Treasury yields and Euro rates, which are both down."

The benchmark 10-year Treasury yield was down 4 bps at 4.31%, now well below a four-month high of 4.479% hit on Wednesday in the aftermath of the U.S. election result.

That rise came as traders bet the tax cut and tariff policies of a second Donald Trump presidency would boost economic growth and inflation, cause the Fed to cut rates by less than they otherwise would, and potentially even raise fears about the sustainability of the U.S. fiscal position.

"Maybe we are going back to thinking about macro data. Friday's payrolls data was disappointing and so we might need to reconsider whether in the short term we might see some disappointing numbers and lower yields before Trump starts ramping up," said Tukker.

U.S. job growth almost stalled in October as strikes in the aerospace industry depressed manufacturing employment,while hurricanes shortened the collection period for payrolls, making it hard to get a clear picture of the labour market.

Eyes were also on the Germany's 10-year swap spread which on Thursday hit -6.70 bps, its lowest level since at least 2003, according to LSEG data.

It has been falling sharply in recent months on a range of factors including expectations for substantial European Central Bank rate cuts and the implications of the ECB reducing its balance sheet.

But the spread rebounded a touch on Friday and was last at -2.40 bps.

Elsewhere, the German two year yield was 2 bps lower at 2.20% and Italy's 10 year yield was 5 bps lower at 3.69%, to leave the gap between German and Italian 10 year yields at 129 bps. (Reporting by Alun John Editing by Ros Russell, William Maclean)