German bonds regain footing after biggest two-day drop since 1970s

By Harry Robertson

LONDON, March 7 (Reuters) - A sharp sell-off in euro zone government bonds abated on Friday, after the biggest two-day fall in Bunds since the 1970s on the back of a complete rewriting of Germany fiscal rules.

Investors were waiting for key U.S. jobs figures and were digesting yet more weak factory data from Germany, where industrial orders fell more than expected in January.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, fell 5 basis points (bps) to 2.835%.

The yield soared 30 bps on Wednesday, when Germany's plan to change its fiscal rules was announced, the biggest one-day rise since the late 1990s.

It then rose another 10 bps on Thursday, making the two-day sell-off the biggest since 1974. Yields move inversely to prices.

Italy's 10-year yield IT10YT=RR was down 1 bp at 3.932%, widening the closely watched gap between Italian and German yields DE10IT10=RR to 109 bps.

The debt of more indebted countries such as Italy has sold off alongside that of Germany, which is traditionally the yardstick for rest of the euro zone.

Germany's two-year bond yield DE2YT=RR, which is sensitive to European Central Bank rate expectations, was 4 bps lower at 2.237%, but remained up 26 bps for the week.