LONDON, Aug 5 (Reuters) - German bond yields tumbled to their lowest in months on Monday as investors rushed to the safety of government debt and dumped stocks, before a reassessment partly helped by U.S. data left them trading near flat on the day.
Weak U.S. employment data published on Friday shook markets' confidence in the global economy, causing traders to price in heavy rate cuts from central banks in the coming months.
Germany's 2-year bond yield slid more than 15 basis points (bps) in early trading to 2.151%, the lowest level since March 2023. The 2-year yield is particularly sensitive to European Central Bank interest rate expectations.
The German 10-year yield, the benchmark for the euro zone, dropped to 2.074%, the lowest since January. Yields move inversely to prices.
The rally in bonds later moderated, however, and the turnaround was given further legs by U.S. data showing services sector activity rebounded from a four-year low in July.
The 10-year yield was last flat on the day at 2.16%, with the two year yield down just 2 bps at 2.32%.
Monday's sharp swings epitomise moves in bond markets throughout 2024, as investors struggle to get a grip on the state of the U.S. economy, what it means for Federal Reserve policy, as well as the knock on effects on Europe.
At the start of the year, markets were pricing around six 25 bp rate cuts from the Federal Reserve they then swung to zero by mid year on the back of resilient economic data and sticky inflation, and are now back pricing 120 bps of cuts across the Fed's three remaining meetings this year.
"It's a game of ping pong. Positioning goes a bit far on one side and then reverses, and market moves have been extreme because positioning has been extreme," said Samy Chaar, chief economist at Lombard Odier.
"We're going a bit far to the extremes, 3.70% seems a bit far on the US 10-year yield. It was a good buy at 4.50%, it is a good sell at 3.70%."
The U.S. 10 year yield was last at 3.78%, down from 4.2% at the start of last week and nearly 4.5% at the start of July.
Traders are currently pricing around 75 bps of European Central Bank rate cuts, though were pricing around 90 earlier in the day, as Europe took its lead from a bruising session in Asia.
It was "an extraordinarily weak overnight session as Asian equities looked to have hit the panic button as they play catch-up with the U.S. data," said Lyn Graham-Taylor, rates strategist at Rabobank.
Friday's data showed that the U.S. unemployment rate unexpectedly rose in July to 4.3% from 4.1% in June. The economy added 114,000 jobs in July, down from 179,000 in June and well below the 175,000 that economists had expected.
Japan's Nikkei 225 stock index plunged 12.4% overnight in its biggest one-day fall since 1987. While European and U.S. shares were last down around 2%, both are above their opening lows.
The gap or "spread" between Italian and German 10-year borrowing costs rose more than 8 bps to 154 bps, its highest since late June, before moderating. It was last at 148.6 bps.
"These moves underscore that markets are past the point where bad macro news is good for spreads," said Hauke Siemssen, rates strategist at Commerzbank.
"Increasing ECB cut expectations no longer compensate for the worsening macro outlook."
Italy's 10-year yield was last up 5 bps at 3.79%. (Reporting by Harry Robertson and Alun John Editing by Emelia Sithole-Matarise, Gareth Jones and Mark Potter)
