* U.S. jobs data disappoints
* U.S., euro zone yields drop and bounce back
* ECB could decide to reduce PEPP buying in June - Kazaks
* Moody’s to review Italy’s credit rating (Releads, adds comments, updates prices)
May 7 (Reuters) - Surprisingly poor U.S. employment data on Friday raised doubts about the country’s economic recovery and triggered big but short-lived swings in U.S. and euro zone government bonds.
The United States economy added just 266,000 jobs in April, a fraction of nearly a million expected, which immediately sent yields sharply lower as fears the American economy was overheating appeared suddenly unfounded.
Investors typically believe a slower than expected recovery would force the U.S. central bank to stick with its ultra-accommodative policy for longer, pushing yields lower.
Tracking sharp movements in U.S. Treasuries, yields in higher rated euro zone bonds fell 4 basis points straight after the data was released but bounced back to where they were prior to the announcement 90 minutes later.
With a flurry of other economic indicators and corporate earnings pointing to an otherwise robust recovery, traders gradually took a more nuanced view than what was suggested by the job data.
“We would not read too much into any one jobs report and continue to think the labour market remains on track and will be more than enough to underpin consumer confidence and consumption”, said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
At 1535 GMT, the euro area benchmark German 10-year yield was up just 1 basis point, curbing its morning rise, while its U.S. peer was flat.
Yields in 10-year Italian bonds rose 5 basis points to their highest since September 2020, after ECB policymaker Martin Kazaks said the central bank could decide to reduce the pace of its emergency bond purchases (PEPP) in June if borrowing costs remain low.
The ECB accelerated the pace of PEPP buying for the second quarter at its March meeting to hold down a rise in bond yields. It will have to revisit that decision in June.
Kazaks also said he believed the bank would “certainly discuss” increasing its conventional bond purchases if the inflation outlook kept to the current forecast when PEPP expires.
Uncertainty about the future pace of ECB bond buying has weighed on Italian bonds, a key beneficiary, alongside supply pressures, given 40 billion euros of additional fiscal stimulus announced in April. Expectations of a 30-year bond triggered a sell-off on Thursday.
Moody’s was due to review Italy’s credit rating later on Friday, which Commerzbank analysts expect it will reaffirm at one notch above junk.
It follows S&P which reaffirmed its Italian rating -- a notch higher than Moody’s and the highest of the main rating agencies -- in April as it balanced the pandemic-related deterioration of Italy’s finances against ECB and European Union support. (Reporting by Yoruk Bahceli and Julien Ponthus; Editing by Alison Williams)
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