Euro zone yields spike to multi-month highs after strong US jobs data

(Updates in late European trading)

Jan 10 (Reuters) - Euro zone government bond yields spiked to new multi-month highs on Friday after data showed the U.S. economy added far more jobs than expected in December, casting further doubt on the number of Federal Reserve rate cuts this year.

Bond yields around the world have risen sharply this week as markets reconsider the outlook for central banks and brace for Donald Trump entering the White House with a pro-tariff agenda. UK debt has been particularly hard hit as investors focus on the country's public finances.

Data on Friday showed the U.S. economy added 256,000 jobs in December, up from 212,000 in November and well above expectations for a 160,000 increase. The unemployment rate fell to 4.1%, from 4.2%.

However, growth in average earnings fell to 3.9% year-on-year from 4% in November.

Germany's 10-year bond yield rose 7 basis points (bps) to 2.597% after the U.S. data, its highest since July. It later fell back to trade roughly 3 bps higher at 2.557%.

The size of the U.S. economy and importance of the dollar mean American data and expectations about Fed rate cuts heavily influence other markets.

The benchmark 10-year U.S. Treasury yield, which sets the tone for borrowing costs around the world, rose more than 10 bps to 4.79%, the highest since November 2023, and last traded 6 bps higher. Yields rise as prices fall and vice versa.

Italy's 10-year bond yield rose 7 bps to 3.781%, the highest since November. It remained at those levels, leaving the gap between Italian and German yields around 4 bps wider at 121 bps.

The jobs data "supports the Fed's decision to slow the pace of rate cuts and has heightened speculation that the loosening cycle is already over, putting further upward pressure on Treasury yields," said Thomas Ryan, North America economist at Capital Economics, adding that the central bank would be reassured to see annual average hourly earnings growth dropping back slightly.

Traders now see just one rate reduction from the Fed this year, coming in June, according to money market pricing. Before the report they had seen the Fed cutting as early as May and saw about a 50% chance of a second rate cut by year-end.

In Europe, markets slightly trimmed their bets on ECB rate cuts this year by about 5 bps. The ECB is still expected to cut by more than 90 bps in 2025, reflecting the bloc's much weaker economy.

Germany's 2-year bond yield, which is sensitive to ECB rate expectations, rose 6 bps to its highest since November at 2.297% but was last up 4 bps. (Reporting by Harry Robertson, editing by Gareth Jones and Toby Chopra, Kirsten Donovan)