As US tariffs on China kick in, euro zone bonds take cue from firmer stocks

Yields on higher-rated euro zone government bonds edged up on Friday as world stock markets reacted with calm as US tariffs on $34 billion in Chinese imports took effect, reducing the appeal of safe-haven debt in the bloc.

Trade was generally subdued ahead of US non-farm payrolls numbers - perhaps the most closely followed US economic indicator - due out at 1230 GMT.

Ten-year bond yields on higher-rated bonds such as Germany and France edged higher as stocks in Europe rallied after the U.S. tariffs kicked in. That firmer tone in shares lifted sentiment towards riskier bond markets, with Italy standing out as the outperformer.

While China said that it is forced to retaliate against US tariffs on Chinese goods, analysts noted a lack of detail to that response.

"There is a cool reaction in equity markets to the trade tariffs and no signs of major retaliation so that takes the edge out of the trade war concerns," said Commerzbank rates strategist Michael Leister.

"Bund yields are also really struggling to move below 0.30 percent."

Germany's benchmark 10-year bond or Bund yield was marginally higher on the day at 0.30 percent, having touched five-week lows at around 0.28 percent earlier this week.

Data on Friday showed German industrial output rose by 2.6 percent in May - the highest rise since November - adding to a weaker tone in the German bond market at the open.

While most euro zone bond yields rose on Thursday after a reported suggested some European Central Bank policymakers were uneasy about market pricing for euro zone rate hikes next year, the selloff proved short-lived.

The outlook for record-low interest rates remaining in place for some time and underlying concerns that a global trade spat will harm economic growth continue to support demand for bonds, especially those from top-rated Germany, analysts said.

In fact, German yields were set for their fourth straight week of declines.

Peripheral bond yields meanwhile fell 2-5 bps led by Italy.

"There's a bit of renewed sentiment towards Italy thanks to stocks," said Orlando Green, European fixed income strategist.

Focus turned to July US jobs data, with more jobs growth and a decline in unemployment likely to support more rate hikes.

"While another solid increase in non farm payrolls is unlikely to have a major impact, any increase in average hourly earnings beyond the consensus estimate of 2.8 percent may trigger at least a minor increase in yields, not only in the US but also in the euro area," UniCredit said in a note.