Euro area government bonds outperform US Treasuries after US data

By Stefano Rebaudo and Samuel Indyk

LONDON, Feb 11 (Reuters) - Euro area government bonds outperformed their U.S. peers after economic data indicated labour market stability that could give the Federal Reserve room to keep interest rates unchanged for some time while policymakers monitor inflation.

Nonfarm payrolls increased by 130,000 jobs last month, while economists polled by Reuters had forecast payrolls advancing by 70,000 jobs. The unemployment rate fell to 4.3% from 4.4% in December.

Traders pared back expectations for Fed rate cuts after the jobs report, but left the European Central Bank policy outlook roughly unchanged.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was up 0.5 bps at 2.81%, while being flat just before the data release. It touched 2.793% earlier in the session, its lowest point since January 14.

The benchmark 10-year U.S. Treasury yield US10YT=RR rose 3.5 bps to 4.18%, after falling more than 5 bps on Tuesday.

NO ECB RATE MOVE EXPECTED

Markets are not pricing in any rate moves from the European Central Bank this year, as inflation is close to target and growth is showing signs of improving.

Traders priced in a 20% chance of a cut by December EURESTECBM7X8=ICAP from around 23% before data.

German Bunds have been taking their cues from U.S. Treasuries in recent days, with U.S. economic data shaping expectations for the Fed’s easing path.

"Overall the correlation remains weak between the two markets," said Michiel Tukker, rate strategist at ING, arguing that the euro zone was facing an improving growth path with fiscal stimulus ahead.

"The U.S. faces a cooling economy, but inflation is still on the hot side. These different narratives reduce the spillovers from the usual macro data releases," he added.

Tuesday's U.S. retail sales figures came in below expectations, while recent labour market figures have suggested the jobs picture was weakening.

Euro area policymakers have recently flagged that the deflationary impact of a stronger euro was worth monitoring, although most have reiterated that the current policy stance was appropriate.

"They (ECB policymakers) have repeated that the euro appreciation we have seen is incorporated into their current forecasts," said Jussi Hiljanen, chief U.S. and euro rate strategist at SEB. "I think it will take a lot more for the ECB to cut rates."

Germany's two-year yield DE2YT=RR, sensitive to changes in ECB policy expectations, rose 1.5 bps to 2.06%, after touching its lowest level since December 1 at 2.04% earlier in the day.