Euro Zone Bond Yields Steady Amid U.S. Employment Data

Euro zone bond yields remained mostly unchanged on Thursday after positive U.S. employment data eased concerns about the global economic health. Germany's 10-year bond yield stood steady at 2.27%, reversing earlier losses. The data reduced expectations for Federal Reserve interest rate cuts, influencing global markets.

Euro zone bond yields held steady on Thursday, reversing earlier declines following unexpectedly positive U.S. employment data that alleviated some concerns about the world's largest economy.

Germany's 10-year bond yield, a benchmark for the euro zone bloc, was stable at 2.27%, while the two-year bond yield was also little changed at 2.41%. Both yields had fallen around 5 basis points earlier in the day but rose after a U.S. Labor Department report revealed new applications for unemployment benefits stood at 233,000 for the week ending August 3, below the 240,000 estimate from a Reuters poll of economists.

This led markets to pare back expectations of aggressive Federal Reserve interest rate cuts, driving Treasury and European yields higher. Kenneth Broux, head of corporate research FX and rates at Societe Generale, noted the reaction highlighted market sensitivity to jobless claims amid signals of either a cooling labor market or a recession.

Weak U.S. payroll data from the previous week had sparked fears of an economic downturn, prompting calls for more substantial Fed rate cuts and causing global market volatility. Stocks sold off globally, and U.S. and European bonds rallied, pushing Germany's yields to multi-month lows before rebounding on Tuesday.

Currently, money markets are pricing in about 100 basis points of further Fed rate cuts by the end of 2024, down from 110 basis points earlier on Thursday but higher than pre-last-Friday levels. Traders also expect 65 basis points of cuts from the European Central Bank. Additionally, the unwinding of leveraged trades linked to the Japanese yen, driven by expectations of a hawkish pivot from the Bank of Japan, contributed to the recent significant market sell-off.

However, a semblance of calm returned on Wednesday after BOJ Deputy Governor Shinichi Uchida assured that interest rates would not be hiked amid market instability. Italy's 10-year yield remained flat at 3.70%, with the spread between Italian and German bunds standing at 143 basis points.

(With inputs from agencies.)