Euro zone bond yields at six week high after solid German jobs data

Updates with afternoon European trading

By Harry Robertson

LONDON, Jan 3 (Reuters) - Euro zone bond yields rose to their highest in six weeks on Friday, after data showed German unemployment rose less than expected in December, a modicum of support for its struggling economy, Europe's largest.

Data on Friday showed the number of unemployed people in Germany increased by 10,000 in seasonally adjusted terms to 2.87 million. Analysts polled by Reuters had expected that figure to rise by 15,000.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, rose 4 basis points (bps) to 2.40%, its highest since mid November. Yields move inversely to prices.

Germany's two-year bond yield DE2YT=RR, which is sensitive to expectations for European Central Bank rates, rose 6 bps to 2.145%, its highest since Nov. 20.

A stronger euro zone economy could lead the European Central Bank to be more cautious when it comes to interest rate cuts.

But analysts have cautioned that trading is still thin after the holidays, meaning prices are more volatile than usual.

"There is clearly a decent chunk of the market that is still out of the office and this means that we are loathe to read too much into market moves," Rabobank analysts said in a research note, referencing Thursday's fall in bond yields.

Italy's 10-year yield IT10YT=RR rose 5 bps to 3.59% and the gap between Italian and German yields DE10IT10=RR stood at 117 bps.

The closely watched gap between French and German bond yields rose to 87 bps on Friday, its highest since Dec. 3.

The spread - a gauge of the premium investors demand to hold French debt - shot up in the summer as elections plunged the country into political turmoil.

It has remained elevated, at around its highest levels since the euro zone crisis of 2012, while new Prime Minister Francois Bayrou attempts to build consensus to pass a budget, something his predecessor Michel Barnier failed to accomplish.

"Investors ... appear to remain unconvinced whether the new French Finance Minister will be able to pass a budget with a deficit of 'slightly above 5%', which is envisioned to be passed by mid-February," said Hauke Siemssen, rates strategist at Commerzbank.

(Reporting by Harry Robertson
Editing by David Goodman and Tomasz Janowski)

((harry.robertson@thomsonreuters.com;))