The German bunds traded nearly flat Friday as investors await the United States non-farm payroll data in lieu of the upcoming Federal Reserve monetary policy meeting.
The yield on the benchmark 10-year bond, which moves inversely to its price, hovered around 0 percent mark, the yield on long-term 30-year note remained steady at 0.62 percent and the yield on short-term 2-year bond stood flat at -0.67 percent by 06:10 GMT.
While ECB tapering fears have eased, thanks in part to dovish ECB minutes and official comments, Treasuries exerted upward pressure on yields as the US employment report loomed. This leaves the 10-year German yield around zero, while the 10-year Treasury-note/Bund yield spread is approaching the 175 basis points mark for the first time this year. The Bund yield should trade between -0.05 percent and +0.03 percent depending on the payrolls.
The September Labor Department employment situation report will be released on Friday at 12:30 GMT. Overall, we expect non-farm payrolls will increase +180k in September (market expectations are for a +175k increase), versus the +151k reading seen in August, alongside no change in the unemployment rate of 4.9 percent (market expectations are for a 4.9 percent result). Great focus will likely be paid to gains in total private employment which we expect will increase around +170k.
Beyond the headline, we expect average hourly earnings will increase +0.2 percent m/m, alongside an increase in weekly hours to 34.4. On balance, despite the volatility seen in recent months, we anticipate further improvement taking hold in the coming months as conditions gradually improve. Given the greater focus on what the Fed is likely to do next following liftoff in December, we anticipate the September employment report will be sufficiently strong enough to justify additional moves higher (though other factors and subsequent reports will likely keep policymakers second-guessing).
Following the Bloomberg story, ECB tapering fears (which we believe are unfounded -- see separate article), the 10-year German yield has shot up to zero for the first time in two weeks. While 0.0 percent is a natural point for reflection, there is nothing to stop the yield from extending as high as its September high of 0.08 percent. That's particularly if solidifying Fed tightening prospects (watch the US employment report on Friday) push Treasury yields up further too. So far, the 10-year T-note/Bund spread has narrowed only slightly to about 172 basis points, though.
Meanwhile, the German stock index DAX set to open a stronger session following stronger oil prices, which could drive gains in the energy sector, closed 0.16 percent lower at 10,568.80 on Thursday.
