Bund yields head for biggest weekly fall since October; US jobs in focus

By Stefano Rebaudo

Jan 9 (Reuters) - Euro area benchmark Bund yields edged up on Friday, but were still headed for their steepest weekly decline since October, having pulled back from nine-month highs on the back of soft economic data.

Activity had been muted ahead of the key U.S. monthly nonfarm payrolls report for December that showed a rise of just 50,000, compared with expectations for an increase of 60,000, while the unemployment rate fell.

The data was enough to preserve expectations for at least two rate cuts from the Federal Reserve this year and had little impact on the euro zone bond market.

The U.S. Supreme Court later said it would not rule on Friday on whether President Donald Trump's sweeping tariffs are lawful. Anticipation ahead of possible Friday rulings had kept market volatility subdued.

German 10-year yields DE10YT=RR, the euro area's benchmark, were up 1.3 basis points on the day at 2.84%, still set for a weekly drop of 5.6 bps.

Yields hit 2.917% before Christmas, just below their March highs, when Germany struck a political deal to increase infrastructure and defence spending. They were above 2.9% early this week.

"The weak payrolls report combined with a lower unemployment rate suggests that the narrative has not shifted for the U.S. labour market. The U.S. is still a low hire and low fire environment. This does not shift the dial for the Fed, aside from confirming that a rate cut in January is highly unlikely," XTB research director Kathleen Brooks said.

U.S. benchmark 10-year Treasury yield US10YT=RR edged up 1.2 bps to 4.193% in the wake of the data. This left their premium to Bund yields at 135 bps, up from around 128.4 bps at the start of the week DE10US10=RR.

On the euro area front, data showed December inflation slowed more than expected in Germany and reached 2% in the euro area. HCOB's final composite Purchasing Managers' Index for the bloc confirmed the euro zone economy expanded at a slower pace.

Markets continued to price a very small probability of an easing move in 2026, implying around a 15% chance of a cut by this summer EURESTECBM5X6=ICAP and a deposit rate stable at 2% in December EURESTECBM8X9=ICAP.

Data showed on Friday German exports unexpectedly fell in November, while industrial output rose despite expectations for a decline.

“Europe’s economic problem child has finally delivered some positive news,” said Carsten Brzeski, global head of macro at ING, referring to the output data.

“The structural headwinds, like geopolitical shifts and the changing role of China in the global economy, remain a severe challenge for German industry,” he said.

German 30-year yields DE30YT=RR were up one bp at 3.49%. They reached 3.556% last year, their highest since July 2011, as long-dated debt came under pressure from expectations of heavier bond supply.

German 2-year yields DE2YT=RR, more sensitive to expectations for policy rates, were unchanged at 2.1%.