* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Olga Cotaga
LONDON, Oct 4 (Reuters) - Euro zone government bond yields edged lower on Friday as traders focused on the effect U.S. tariffs might have on the European Union economy and bought safe-haven government bonds.
Bonds started to rally on Thursday, after United States said on Wednesday it would impose 10% tariffs on European-made Airbus planes and 25% duties on European products such as French wine, as punishment for illegal EU aircraft subsidies.
A euro zone bond rally had stalled earlier in the week— while U.S. Treasury yields tumbled — as concern grew that the European Central Bank had limited room to boost growth and inflation. But dismal economic data in the United States revived fears of recession and pushed euro zone yields back down.
In early trade, 10-year bond yields across the bloc fell 1 to 2 basis points. Benchmark German 10-year Bund yields were down 1.8 bps at -0.59%.
Traders will be watching whether euro zone yields fall further on Friday by a U.S. non-farm payrolls report that comes in weaker than expected, raising expectations the Federal Reserve will cut interest rates by 25 basis point at the end of October.
“A weak (U.S. payrolls) number would be seen as putting some pressure on the Fed to consider further rate cuts this autumn,” said Andy Cossor, rates strategist at DZ bank.
“Time will tell” whether the U.S. central bank’s two rate cuts this year will be enough, Dallas Federal Reserve Bank President Robert Kaplan said on Thursday, but he is willing to do more “if it’s necessary.”
That would push down euro zone yields, but the fall would only be temporary, Cossor said. The “euro zone will be thinking about its own economic problems,” referring to the impact of U.S. tariffs.
A Reuters poll forecast that 145,000 jobs were added in the United States in September, more than August’s 130,000 jobs.
Elsewhere, Italy was ready to issue its first new dollar bond in nearly a decade, sources told Reuters on Thursday. The sale may be announced as early as next week.
Also, DBRS is expected to review its positive-outlook rating for Portugal on Friday night. Portugal holds a parliamentary election on Sunday; Prime Minister Antonio Costa is expected to win re-election. (Reporting by Olga Cotaga)