Trichet sends euro debt lower

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Repercussions from the European Central Bank saying it could raise interest rates swept across markets on Friday, hammering short-tern euro zone debt, while investors also faced the key monthly U.S. jobs report.

Global stocks rallied as investors fled bonds. The euro held on to its heavy previous day's gains against the dollar, which in turn gained against the Japanese yen.

ECB President Jean-Claude Trichet jolted markets by saying higher benchmark interest rates were "possible" in July, kicking the euro higher and driving up bond yields as investors sold government debt.

Two-year euro zone government bond yields rose so far above 10-year yields on the sell-off that the resulting yield curve inversion is at its widest since the launch of the euro.

An inverted curve is an anomaly as longer-term interest rates are usually higher than short-term rates.

"The short end of the (euro debt) yield curve is getting slaughtered," said Marc Ostwald, a bond analyst at Insinger de Beaufort in London.

Two-year yields EU10YT=RR were up at 4.671 percent while 10-year yields dipped on the day to 4.462 percent.

Stronger-than-expected U.S. weekly jobs data on Thursday, meanwhile, also weighed on government bonds, boosted stocks and set the stage for the monthly payrolls report data later on Friday.