Longer-dated euro zone government bonds fell on Friday with the market braced for a key US employment report, which is likely to set the market tone into next week. A Reuters survey of 84 economists on Thursday forecast US non-farm payrolls, due at 1330 GMT, would be flat in December after dropping by 11,000 in November, far fewer than in previous months.
Such a reading would boost optimism that the economic recovery is well underway and likely lead to an outlook for higher interest rates. "The market's got a slight bearish slant to it so the figure will have to be quite strong to push Bunds significantly lower," said Nick Stamenkovic, a rate strategist at RIA Capital Markets.
"But any signs that the US labour market is at a turning point will be bad news for bonds and put upwards pressure on yields, at the very least we'd see the 3.40 percent level on the 10-year Bund tested again."
At 0815 GMT, March Bund futures were 10 ticks lower at 121.34.
Bunds were given a lift on Thursday after the week's scheduled auctions were completed smoothly and the market digested the new supply. "The risk scenario now for the market is that we see a decent fall in payrolls as everyone has whipped themselves up into thinking its going to be a good report, even a positive number," said a trader.
Shorter-dated debt outperformed with two-year bond yields were 2.4 basis points lower at 1.277 percent. Ten-year yields were up 1.5 basis points at 3.388 percent. Japanese stocks hit a 15-month high overnight, while European shares nudged higher at the open, adding to pressure on Bunds.
The generally improved risk appetite also saw non-German bonds mostly outperform Bunds. Greek 10-year bond spreads were little changed around 230 basis points from Thursday's close. A European Union inspection team on Thursday asked Greece for a more specific three-year plan to shore up the country's ailing finances.
In the interest rate swaps market, rates out to 10-year maturities remained near their lowest levels since late December on receiving interest ahead of several sovereign syndicated deals set to hit the market in coming weeks.
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