* Strong U.S. wage growth boosts inflation expectations
* Euro zone yields follow U.S. Treasury yields higher
* German Bund yields highest since Sep 2015 (Updates prices, adds Viceroy)
By Fanny Potkin
Feb 2 (Reuters) - Euro zone bond yields extended their rise on Friday after U.S. payroll data indicated that annual wage growth in the world’s biggest economy was the strongest since 2009.
U.S. job growth surged in January and wages increased further, recording their largest annual gain in more than 8-1/2 years and bolstering expectations that inflation will rise this year as the labour market hits full employment.
“It was an extremely strong report,” said John Vail, chief global strategist at Nikko Asset Management.
“The wage data, especially, is negative for bonds because it shows there is greater inflation on the horizon.”
Germany’s 10-year government bond yield, the benchmark for the euro zone, hit a day’s high of 0.768 percent, up 4 basis points (bps) on the day, before edging back to 0.757 percent in late trades..
The British 10-year government bond yield jumped to 1.609 percent after the data, its highest since May 2016, up 7 bps on the day, as March gilt futures extended losses.
Meanwhile, the 10-year U.S. Treasury yield rose to 2.854 percent, its highest in four years.
“There’s definitely a correlation between U.S. and European bonds but it’s also important to remember the two regions have completely different dynamics,” said Mizuho strategist Antoine Bouvet.
“We expect that eventually U.S. Treasuries will underperform Bunds, and the spread between the two will widen further.”
The gap between U.S. and German 10-year government bond yields, the “transatlantic spread”, widened a touch after the payroll data to 207 bps from 205 bps before, and is close to some of widest historical levels.
German Bund futures briefly dropped below a cash price of 158.00 for the first time since December 2015, before rising back up to 158.10; still down 51 ticks on the day.
Elsewhere, French central bank chief Francois Villeroy de Galhau said on Friday the European Central Bank was normalising policy and whether it ended asset purchases in September or wound them down gradually was not an “existential” issue. (Reporting by Fanny Potkin, Additional reporting by David Milliken and Saikat Chatterjee; Editing by Abhinav Ramnarayan and Mark Potter)