UPDATE 1-German Bund curve steepens as strong business surveys come in

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LONDON, Sept 3 (Reuters) – German 30-year government bond yields saw their gap over benchmark Bunds hit the widest level in around two months on Friday as euro zone business surveys signposted a rapidly recovering economy.

Purchasing Managers’ Index (PMI) surveys for the services sector in Italy, France, Germany and the euro zone came out early on Friday, all pointing to healthy growth.

Euro zone government bond yields have been rising in recent weeks with inflation and economic indicators in the single currency bloc beating expectations. Investors are betting that the ECB will have to begin the debate about ending the pandemic emergency purchasing programme (PEPP).

“The service sector has remained resilient in the face of a resurgence in Covid-19 cases,” ING analysts said in a note, adding that manufacturing has been hit by supply chain disruptions.

The gap between Germany’s 10- and 30-year bond yields hit 50.5 basis points on Friday morning, the widest level since early July.

Long-dated bonds are seen as beneficiaries of ECB largesse and the hunt for yield, and they tend to suffer the most on speculation of monetary policy tightening.

German 10-year Bund yields were hovering around -0.377%, up marginally on the day and 13 basis points higher than last month’s lows.

Greek government bonds have been hit particularly hard — Greece was included in ECB purchases for the first time under PEPP; usually the central bank only buys debt of investment grade-rated countries.

Greece’s 10-year borrowing costs have risen nearly 20 basis points from its August lows, and was up 1.5 bps to hover near a two-month high at 0.764% on Friday.

Later on Friday, non-farm payroll data from the United States will be closely watched for a big jump in employment.

With U.S. Federal Reserve policymakers remaining highly cautious on the subject of tapering, only a significant beat of expectations is likely to change the current trajectory of U.S. rates, the ING analysts said.

Indeed, U.S. 10-year Treasury yields were only marginally higher at 1.302% on Friday.

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