UPDATE 3-Benchmark German yield falls further below ECB deposit rate

* Euro zone periphery govt bond yields (Updates prices)

Aug 5 (Reuters) - Euro zone bond yields fell in quiet trade on Thursday ahead of a key U.S. jobs data reading due on Friday.

Government bond yields on both sides of the Atlantic have continued falling in the first week of the month after a plunge in July that gave bond prices their best performances since before the start of the pandemic. Bond yields move inversely with prices.

Euro area government bond have moved broadly in tandem with U.S. Treasury yields in recent sessions, as a potential cut to Treasury issuance later in the year and lower than expected private employment and manufacturing growth data helped keep U.S. yields subdued.

But euro area bonds outperformed Treasuries on Thursday.

Germany’s 10-year yield, the benchmark for the bloc, was down 1.1 basis point (bps) at -0.504% by 1511 GMT after sliding earlier to a low of -0.524%, further below the European Central Bank’s -0.50% policy rate after crossing that threshold on Wednesday for the first time since January.

Lower-rated southern European bonds led Thursday’s rally and Italy’s 10-year yield fell at one point 5 bps to the lowest since mid February. It was last down 3.8 bps at 0.517%.

That squeezed the closely watched gap with German 10-year yields to around 101 bps, the narrowest since July 26.


The bloc’s bonds remain supported by the ECB’s recent policy shift and recent comments on its pandemic emergency bond buying, said Jens Peter Sorensen, chief analyst at Danske Bank.

The ECB pledged to keep rates lower for longer at its June meeting in order to meet a revised inflation target.

Policymakers do not expect to decide on the future of their emergency bond purchase programme in September as there will still be uncertainty over the path of the pandemic at that point, three sources told Reuters in July.

Uncertainty regarding the Delta variant, along with a belief that rising inflation is likely transitory, and low supply during July and August, are also keeping yields low, Sorensen added.

Data on Thursday showed German industrial orders rose more than expected in June after a drop in May, but material shortages continue to weigh on production. The figures had little impact on bond markets, however.

Focus across bond markets was on the Bank of England, which left its monetary policy unchanged but said it would start reducing its stock of bonds when the policy rate reaches 0.5%.

In auctions, France raised 7.498 billion euros from the reopening of bonds due 2031, 2032 and 2034.

Spain raised 5.089 billion euros from bonds due 2024, 2026 and 2031, and an inflation-linked bond due 2030.

Bond markets are eyeing U.S. non-farm payrolls data due on Friday, which may be the next catalyst to move U.S. Treasuries, and which euro area government bonds will likely follow.

[ANALYSIS-Stagflation? Recession? Bond market messages puzzle investors

Reporting by Yoruk Bahceli, additional reporting by Danilo Masoni Editing by Mark Potter, David Holmes and Susan Fenton