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

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 Germany's plans to completely rewrite its fiscal rules.

Investors were waiting for 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 2.834%.

"A memorable week is drawing to a close, allowing markets to take stock of the seminal changes in German fiscal politics as well as tariffs and the European Central Bank," said Michael Leister, head of interest rates strategy at Commerzbank.

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 after the ECB cut rates but said it was watching European spending plans closely, making the two-day sell-off the biggest since 1974. Yields move inversely to prices.

Pooja Kumra, senior European rates strategist at TD Securities, said she expects Bund yields to fall slightly from here and trade in the 2.4%-2.7% range.

"We still believe that it's hard for Bunds to break their correlation with (U.S.) Treasuries," she said in a research note.

"The negative impulse from tariffs will have a more immediate impact than from the longer-term overhaul of the German economy."

U.S. Treasury yields US10YT=RR fell to their lowest level since October at the start of this week after weak manufacturing survey data suggested companies are struggling with unclear tariff policies.

Data later on Friday is expected to show U.S. employment growth picked up in February, but uncertainty over trade could dent the labour market in the months ahead.

Italy's 10-year yield IT10YT=RR was down 5 bps at 3.894%, leaving the closely watched gap between Italian and German yields DE10IT10=RR at 106 bps.

The bonds of more indebted countries such as Italy have sold off alongside those of Germany, which is traditionally the yardstick for the rest of the euro zone, raising government borrowing costs across the bloc.

Germany's two-year bond yield DE2YT=RR, which is sensitive to ECB rate expectations, was 4 bps lower at 2.24%, but remained up 26 bps for the week.

German borrowing costs soar after historic overhaul of spending rules (Copy)