Euro zone bond yields edge lower as US debt sells off after jobs data

LONDON, July 3 (Reuters) - Euro zone government bond yields ended Thursday lower with the focus on events outside the currency bloc, after U.S. jobs data blew past expectations, and the British gilt market after the previous day's sharp selloff there.

Germany's 10-year bond yield closed down 4 basis points at 2.578%, having touched an earlier low of 2.571%. DE10YT=RR. Kenneth Broux, head of corporate research FX and rates at Societe Generale, said Thursday's modest strength was a reversal of Wednesday's "UK induced sell off and spike above 2.60%".

Euro zone bonds got caught up in the gilt sell-off that was driven by renewed worries about the UK's public finances and the future of finance minister Rachel Reeves.

Germany's 10-year yield, the euro zone benchmark, rose 5 basis points on Wednesday.

British Prime Minister Keir Starmer said later on Wednesday that Reeves will be in post "for a very long time to come,". Gilt yields were down around 8 basis points on Thursday. GB10YT=RR GB/

The main event for most markets on Thursday was the monthly U.S. employment report, which showed the economy generated more jobs than expected in June, which virtually eliminated any chance of a rate cut from the Federal Reserve in July, as far as traders were concerned.

Treasuries sold off, pushing up yields, yet Bunds hung on to the day's price gains, given the U.S. data did little to shift any expectations for euro zone rates.

The premium of 10-year Treasury yields over 10-year Bund yields rose 10 bps to 176 bps, according to LSEG data, making this the largest one-day increase in a month DE10US10=RR.

Societe Generale's Broux earlier said the data would help indicate whether market repricing of more Federal Reserve rate cuts this year had gone too far.

He added that while U.S. inflation data later in the month was the most important data release, if the jobs numbers were higher than expected that would "strengthen the hand of the hawks on the FOMC", the Fed's rate setting body, represented by its chair Jerome Powell, and "their conviction that waiting is the better option to assess the impact of tariffs".

Markets currently see two 25-basis point cuts this year from the Fed, with the first now likely in September. Prior to the jobs data, traders were placing a 25% chance of a cut as early as this month.

The European Central Bank, which has been much more aggressive than the Fed when it comes to rate cuts, with inflation in control and growth more sluggish, is much nearer the end of its cutting cycle.

Markets see the ECB cutting just once more this cycle, likely late this year.

The other U.S. development on investors' minds is U.S. President Donald Trump's tax-cut and spending bill which Republicans in the House of Representatives advanced toward a final yes-or-no vote early on Thursday morning.

Back in Europe, Italy's 10-year yield IT10YT=RR ended down 6 bps on Thursday at 3.47%, completely reversing the previous day's increase.