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UPDATE 2-German bond yields dragged lower by U.S. peers after payrolls
February 3, 2017 / 2:41 PM / in 8 months

UPDATE 2-German bond yields dragged lower by U.S. peers after payrolls

* US payrolls rise, but wage growth modest

* Poll shows Socialists closing gap on Merkel’s bloc

* Analysts say could result in more fiscal pledges

* French bonds hurt by political risk

* Euro zone periphery yields tmsnrt.rs/2ii2Bqr (Updates with price)

By John Geddie and Dhara Ranasinghe

LONDON, Feb 3 (Reuters) - Germany’s benchmark 10-year Bund yield fell to a 1-1/2 week low on Friday, pushed down by a decline in its U.S. peers after tepid wage growth data took the pressure off the U.S. Federal Reserve to lift interest rates soon.

U.S. nonfarm payrolls rose by 227,000 jobs in December, more than expected and the largest gain in four months. But the unemployment rate nudged up to 4.8 percent and wages increased modestly, suggesting inflationary pressures from the jobs market may not be as great as some investors have thought.

“The data suggests the jobs market is not producing significant wage pressures yet, which means the pressure is off the Fed to hike rates,” said Chris Scicluna, the head of economic research at Daiwa Securities.

Germany’s benchmark 10-year Bund yield reversed earlier rises to fall after the data. It dipped 1.5 basis points to 0.406 percent, its lowest level since Jan. 25.

German bond yields, alongside euro zone peers, had opened the day higher after a poll showed Germany’s election race tightening, which could signal more fiscal stimulus in the bloc’s biggest economy and less support for right-wing populists.

Analysts said the suggestion of more pressure from the left made it more likely politicians in Germany - one of the main proponents of the austerity that some argue has held back economic recovery - may shift towards fiscal stimulus, which would boost growth and inflation.

Higher inflation erodes the value of bonds, while better growth prospects encourage investors to shift into riskier assets like equities.

“If we believe there is a serious fight, then the only outcome is a looser fiscal policy in Germany because either a new left-leaning government is going to spend money or Merkel has to promise a lot of sweeties to the electorate to stay in power,” said Peter Schaffrik, RBC’s global macro strategist.

Germany’s election will not be held until September, and investors will have to navigate knife-edge votes in the Netherlands, France and possibly Italy before then. But some analysts said signals that Germany’s anti-establishment AFD was losing support had provided optimism for markets.

Most other euro zone yields pared back their rises after the U.S. payrolls data, but French bond yields remained 4 bps higher on the day at 1.08 percent, while the French/German 10-year yield gap pushed out to 67 bps - its widest in 3 years.

Analysts said news on Friday that a French soldier had wounded a machete-wielding man as he tried to enter the Louvre museum in Paris could strengthen the position of the far-right’s Marine Le Pen in looming presidential elections, keeping investors uneasy about rising political risks in France.

Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Andrew Heavens)

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