Euro zone bonds echo firm Treasuries; US shutdown rumbles on

By Amanda Cooper

LONDON, Oct 2 (Reuters) - Euro zone government bond yields edged lower on Thursday, echoing strength in the U.S. debt market, after private sector data suggested the labour market is weakening, while a U.S. government shutdown made for an uncertain backdrop.

Wednesday's ADP monthly report showed 32,000 workers left in September from U.S. private sector payrolls, against forecasts for a rise of 50,000, and after a downwardly revised 3,000 drop in August.

With the government in Washington closed, there is unlikely to be a nationwide monthly employment report on Friday, as originally scheduled, leaving economists, investors and politicians alike in the dark about the wider jobs picture.

German 10-year Bunds DE10YT=RR, which serve as the benchmark for the wider euro zone, dipped 1.5 basis points on the day to 2.7%, having ended Wednesday roughly around this level following an intraday dip to 2.693%. Bund yields, which have traded relatively flat for the last couple of months, are heading for a second weekly decline, marking their first two-week drop since mid-June.

"Bund dips should continue to be bought while the market is flying blind with key U.S. labour market data not released due to the U.S. shutdown," Commerzbank chief rates strategist Christoph Rieger said, adding that the shutdown does little to help sentiment and "we suggest buying Bunds at 10y yields above 2.7%.

German two-year Schatz yields DE2YT=RR, which are more responsive to near-term shifts in expectations for euro zone interest rates, were steady at 2.016%.

On the supply front, France achieved healthy demand for the 10-year and longer-dated bonds it sold at auction on Thursday. Its 2035 and 2036 OATs achieved a bid-to-cover ratio of 2.533 and 2.947, respectively.

By contrast, Germany's sale of 10-year Bunds on Wednesday attracted tepid demand, with a bid-to-cover ratio of just 1.2, in line with the lowest levels this year.

French 10-year yields FR10YT=RR, which on Thursday were trading steadily at 3.522%, are now among the highest in the euro zone, behind Italy, where yields are around 3.55%, reflecting investor concern about the sustainability of France's long-term finances.

Italy, which has won favour with investors in the last couple of years for its fiscal discipline, is ahead of schedule to lower its budget deficit to 3% of gross domestic product (GDP), Italy Industry Minister Adolfo Urso said on Thursday.

Italian yields IT10YT=RR were down 1.2 bps at 3.543%, set for a 6.5-bp drop this week, marking their largest weekly decline since early September.

"If realised, that would be the first sub-3% deficit since 2019 before the Covid pandemic. It also contrasts with the French situation, where even former (Prime Minister Francois) Bayrou’s proposals to reach a 3% deficit by 2029 were unable to pass. So that’s coincided with the Italian 10-year yield falling beneath France’s in recent weeks, and yesterday it closed 0.4bps beneath France’s," Deutsche Bank strategist Jim Reid said.