* U.S. payrolls data beats expectations, hit Bunds
* U.S./German 10-year yield spread widest since Oct. 2006
* Portuguese sell-off eases as PM says government to hold
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, July 5 German government bonds fell on
Friday after forecast-beating U.S. jobs data kept the Federal
Reserve on track to reduce stimulus, but losses were limited by
the European Central Bank's contrasting policy outlook.
U.S. Treasury bonds fell more sharply than Bunds after the
much-anticipated data and the U.S./German 10-year yield spread
hit its widest since October 2006 at close to 100 basis points.
U.S. employers added 195,000 new jobs last month, 30,000
more than the market had expected, showing the U.S. economic
recovery was gathering pace and keeping the Fed's plans to scale
back bond purchases later this year on track.
German debt, which usually trades in line with U S.
Treasuries due to the two assets' safe-haven status, sold off,
pushing yields higher across the curve. Bund futures
were last half-a-point lower at 141.79, having fallen as low as
141.39 immediately after the data.
But analysts said the ECB's unprecedented commitment on
Thursday to keep rates at record lows for an extended period or
even cut them would stop euro zone benchmark yields rising far.
"The data was pretty good ... but it was surprising the
market here in Europe reacted that massively," said Christian
Lenk, strategist at DZ Bank in Frankfurt.
"The market is unlikely to continue this sell-off. (ECB
President Mario) Draghi has stressed there's a major difference
in the outlooks of the Fed and the ECB."
He said a political crisis in Portugal and doubts about the
disbursement of the next tranche of Greek bailout deal were also
likely to support Bunds.
The prospect of less central bank liquidity meant
longer-term German yields rose faster than those on
Ten-year German yields rose 5 basis points to
1.71 percent, while two-year yields rose 1 bps to 0.13 percent.
"The short end should outperform given the ECB outlook, but
the movement in the long end should still be a fraction of the
movement in the U.S. because the euro zone economy is lagging,"
said Alan McQuaid, chief economist at Merrion Stockbrokers in
U.S. T-note yields rose 17 bps to 2.67 percent.
In Portugal, bond yields fell sharply following the prime
minister's assurances on Thursday that he can keep the
government stable after two ministers resigned this week.
The crisis raised worries over the future of Pedro Passos
Coelho's government and its ability to exit a 78 billion euro
bailout programme by mid-2014 as planned.
Portuguese 10-year yields, which topped 8
percent earlier this week, were last 25 bps down on the day at
Two-year yields fell 41 bps to 5.62 percent.
The fall in shorter-dated yields was, however, insufficient
to reverse the sharp underperformance of longer-term maturities
this week which saw the yield curve at its flattest since March
2012, reflecting perceptions of rising credit risk.
DZ Bank's Lenk said the market had over-reacted to the
crisis. "But Portugal is a different kind (of bond) compared
with the other peripherals. Not being investment grade restricts
a lot of investors and liquidity is low."
Italian and Spanish yields, which also rose this week,
albeit less steeply than Portugal's, on fears of a fresh
flare-up in the euro zone debt crisis, fell 2-4 bps at 4.40
and 4.60 percent respectively.
The rise in Italian and Spanish yields was tempered by the
ECB's long-standing conditional pledge to buy the bonds of
countries that seek its help and by a growing perception among
investors that the fortunes of the euro zone's troubled debtors
and no long as tightly linked as they once were.