German yields slip but market fragile before U.S. jobs data
* Market stabilises after previous day's sell-off
* Bunds recovery limited before U.S. jobs report
* Data seen reinforcing view Fed to start cutting stimulus
By Emelia Sithole-Matarise
LONDON, Sept 6 (Reuters) - German yields slipped on Friday as the market took a breather from the previous day's sell-off but the recovery was limited before U.S. jobs data that could determine when the Federal Reserve will cut monetary stimulus.
Ten-year yields flirted around the 2 percent mark they topped on Thursday for the first time since March 2012, as an improving economic outlook hit top-rated global debt and the ECB signalled no imminent action to curb rising money market rates.
Bunds were seen vulnerable to renewed selling with the U.S. non-farm payrolls report at 1230 GMT seen capping a week of forecast-beating data which could prompt the Fed to start tapering stimulus after its Sept. 17-18 policy meeting.
The world's biggest economy is expected to have added 180,000 non-farm jobs last month, keeping the unemployment rate steady at 7.4 percent.
"If the payrolls report is strong it could get very messy again. Presumably consensus has moved up after yesterday's data so maybe the risk is it comes below and we get a bit of a lift going into the weekend but the tone is pretty bearish," a trader said.
German 10-year yields were 3.5 basis points lower at 2.00 percent, having risen as high as 2.059 early in the session.
Bund futures were 39 ticks higher on the day at 138.98, having fallen more than one full point the previous session. They were still on course to post their biggest weekly fall in three weeks.
"It's typically a correction after the sell-off we had yesterday," Patrick Jacq, a strategist at BNP Paribas, said of the modest bounce-back in Bunds.
"Having said that, the market remains exposed to further selling pressures in the near term given the economic backdrop and what we can expect regarding the Federal Reserve."
German 10-year yields could rise as high as 2.10 percent if the payrolls report overshoots forecasts, he added.
Some in the market had been looking to the European Central Bank's policy meeting on Thursday for hints of imminent action to back up the central bank's verbal efforts to counter upward pressure on money market rates from the Fed's policy shift.
Bond markets shrugged off ECB President Mario Draghi's affirmation that the bank would keep monetary policy accommodative for a long time. He also said risks to the economy remained to the downside.
"The ECB President did strike a dovish tone, but did not go far enough, and ultimately failed to dampen rate hike expectations," ING strategists said in a note.
The lull in financial markets before the U.S. data allowed Spanish bonds to claw back some ground, with 10-year yields down 6 bps at 4.55 percent, extending their outperformance of Italian equivalents.
The 10-year Spanish yield premium over Italy squeezed back to 2 basis points, the least in 1-1/2 years, as rising political tensions in Rome weighed on bonds issued by the euro zone's third biggest economy.
An ally of Silvio Berlusconi said the former premier had prepared a message that could announce a decision to bring down the country's ruling coalition if lawmakers voted to boot him out of the Senate.
Berlusconi's allies have raised the stakes for Prime Minister Enrico Letta's government ahead of a meeting on Monday of a special Senate committee that will vote on whether to strip him of his parliamentary seat after a conviction for tax fraud.
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