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U.S., European yields pull back

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Focus on U.S. jobless claims data

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German-Italian spread widens slightly

By Sruthi Shankar

Aug 8 (Reuters) - Euro zone bond yields dropped on

Thursday, as investors sought more clues on the outlook for the

global economy and monetary policy after days of volatile

trading that pushed yields to multi-month lows earlier in the

week.

Germany's 10-year bond yield, the benchmark for

the euro zone bloc, fell 4.1 basis points to 2.232%, while the

two-year bond yield, which is more sensitive to

European Central Bank rate expectations, fell 5.9 basis points

to 2.356%.

Yields on both rose on Wednesday, with the 10-year yield

marking its biggest daily increase in more than five weeks, as

an improvement in broader risk appetite prompted investors to

sell bonds. Bond prices move inversely to yields.

Euro zone government bond yields are, however, not far off

Monday's multi-month lows after a weak U.S. jobs report late

last week ignited fears of an economic downturn that could

warrant bigger rate cuts from the Federal Reserve, which in turn

gave the U.S. Treasury market a boost.

The unravelling of leveraged trades linked to the Japanese

yen, which has benefited in part from expectations of a hawkish

pivot from the Bank of Japan (BOJ), also contributed to the big

selloff in global stock markets.

A semblance of calm returned to markets on Wednesday after

BOJ Deputy Governor Shinichi Uchida said the central bank will

not hike interest rates when markets are unstable. The relief

however proved short-lived, with stocks in Europe tumbling 1%

Thursday and U.S. stock futures under pressure.

"What markets were expecting is the U turn from the BOJ's

Uchida would foster risk sentiment and the stock market will

grow. But it doesn't seem that it has had that kind of an

effect," said Althea Spinozzi, head of fixed income strategy at

Saxo Bank.

"We cannot forget that the futures markets are pricing in a

very aggressive interest rate cut from the FOMC, and at any

point, markets might second guess this notion. So there might be

a situation where not only stock markets go lower but also

bonds."

Investors will focus on U.S. weekly jobless claims data and

speeches from Fed policymakers later on Thursday.

Money markets show traders are pricing in about 112 basis

points (bps) of further rate cuts from the Fed by the end of

2024, and 72 bps of cuts from the European Central Bank. The

odds stood at about 85 bps and 60 bps, respectively, a week ago.

The German 2-year/10-year yield curve moved to be slightly

less inverted on Thursday, with the gap between the two at

-12.30 basis points. The U.S. equivalent turned positive for the

first time in two years on Monday.

Italy's 10-year yield was lower by 2.8 bps​ at

3.678%, and the gap between Italian and German bunds

widened 1.2 basis points to 144 bps.