Euro zone yields drop after US data, remarks from Fed officials

By Stefano Rebaudo

Sept 4 (Reuters) - Euro zone government bond yields fell on Thursday after weak U.S. data and dovish remarks from Federal Reserve officials.

However, investors remained concerned about rising public debt and increased bond supply in the euro area, with France’s government facing a likely collapse next week over a contested budget vote, while Germany is ramping up fiscal spending.

Fed officials continued to animate their belief that rate cuts lie ahead, while job openings fell in July, reflecting a softening labour market.

Markets await further U.S. jobs data and the latest reading from the ISM Services PMI later in the session.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, dropped 3.5 basis points (bps) to 2.71%.

U.S. Treasury yields edged down in London trade on Thursday after falling sharply the day before.

Ultra long-dated euro zone government bonds came under selling pressure earlier this week, with yields hitting multi-year highs, as investors grew increasingly concerned about rising debt levels across the bloc.

Markets expect Germany's investment plans, along with likely increases in defence spending across euro area countries, to push up debt.

Yields on 30-year German bonds DE30YT=RR was down 4 bps at 3.32%. They hit 3.434% on Wednesday, their highest levels in over 14 years.

“Euro area government bonds are probably not out of the woods as the underlying fiscal challenges and funding implications still loom large,” said Hauke Siemssen, rate strategist at Commerzbank.

France’s 30-year yield FR30YT=RR was down 5 bps at 4.40%. It hit 4.523% on Tuesday, its highest since June 2009.

The yield gap between 10-year French government bonds DE10FR10=RR and safe-haven German Bunds — a market gauge of the risk premium investors demand to hold French debt — widened to 79 bps after reaching 82 bps last week.

French Finance Minister Eric Lombard said the government would have to compromise on plans to cut the budget deficit if Prime Minister Francois Bayrou is toppled in a confidence vote on September 8, the Financial Times reported on Wednesday.

Analysts also noted that, despite expectations for a higher risk premium on ultra-long borrowing costs, demand for longer-dated bonds remained quite robust.

Italy’s Treasury said on Tuesday it raised 5 billion euros through a new 30-year BTP, after attracting around 107 billion euros in total orders.

Spain’s 30-year yields ES30YT=RR fell 5 bps to 4.19% after reaching 4.31% on Tuesday, their highest since November 2023.

Italy's 10-year yield IT10YT=RR was 4.5 bps lower at 3.59%, and the gap between Italian and German bunds DE10IT10=RR tightened one bp to 88 bps.

Italy’s 30-year yields IT30YT=RR fell 6 bps to 4.62%.