Euro zone bond yields lag US Treasuries after US economic data

By Stefano Rebaudo

Sept 5 (Reuters) - Euro zone government bond yields lagged behind U.S. Treasuries, which dropped sharply after data releases on Friday, sending the spread between German and U.S. borrowing costs to its lowest level since early April.

U.S. job growth weakened in August while the unemployment rate increased, confirming that labour market conditions were softening, boosting bets on Federal Reserve rate cuts.

Stronger economic prospects and expectations of "higher for longer" policy rates slowed the decline in euro area yields.

Money markets priced in 70 basis points of Fed monetary easing by December, implying two 25 bps cuts and an 80% chance of a third move, from 60 bps before economic figures.

They also indicated a 25 bps rate cut in September, along with a 10% chance of a 50 bps move - up from zero before the data release.

Germany's 10-year bond yield, the benchmark for the euro zone bloc, fell five bps to 2.67%. It hit 2.80% on Tuesday, its highest level since March 26.

The benchmark 10-year U.S. Treasury yield dropped 10 bps to 4.08%, narrowing the yield gap between U.S. and German borrowing costs to 141 bps, its lowest since April 7, when a sharp selloff in U.S. assets started.

Ultra-long euro zone borrowing costs dropped late this week ahead of U.S. data, after hitting multi-year highs.

Expectations of rising debt levels have strengthened the case for a higher risk premium on longer-dated bonds.

Yields on 30-year German bonds fell four bps to 3.30%. They reached 4.434% on Wednesday, their highest level since summer 2011.

Germany's 2-year yields, more sensitive to expectations for European Central Bank policy rates, fell three bps to 1.93%.

(Reporting by Stefano Rebaudo; Editing by Joe Bavier)