Euro zone yields eye biggest weekly fall since June; await US data

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By Stefano Rebaudo

Aug 7 (Reuters) - Euro zone government bond yields were on track for their biggest weekly fall since the end of June on hopes of a deal on reopening the Strait of Hormuz, although borrowing costs climbed for a second day on Friday after the latest developments suggested tensions between Iran and the U.S. have yet to ease.

Although U.S. President Donald Trump told reporters on Thursday that he believed the war with Iran would be over soon, oil prices rose on Friday.

German 2-year bond yields, which are more sensitive to interest rate expectations, rose 0.5 basis points to 2.74% but were on course for a 7-bp weekly fall.

Germany's 10-year bond yield was up 1.5 bps to 3.14%, and on track for a 6-bp weekly drop.

German exports and industrial production beat expectations in June, adding to signs that Europe's largest economy gained momentum in the second quarter.

Money markets scaled back bets on the ECB deposit rate to 2.73% in March 2027 EURESTECBM5X6=ICAP from the current 2.25%. They indicated a deposit rate of about 2.80% late last week.

Markets are also awaiting U.S. employment data due later in the session, which could shape expectations for the Federal Reserve's interest rate trajectory.

"A stronger labour market would add to the notion that the economy remains resilient which could support the case for a rate hike if inflation were to prove stubborn," Erik Liem, rate strategist at Commerzbank, said.

"Fed's Barkin could provide his view on the data in a scheduled fireside chat in the afternoon," he added.

Richmond Fed President Thomas Barkin participates virtually in a fireside chat on the economy at 1400 GMT.

Bank of St. Louis President Alberto Musalem on Thursday added his voice to the chorus of central bankers who believed the Fed should have raised its rate target last week.

Fed Chairman Kevin Warsh has offered virtually no policy guidance, raising concerns that the central bank may be reluctant to raise rates to curb inflation.

Italian 10-year yields IT10YT=RR were up 0.5 bps to 3.92%. Their yield gap with German bunds <DE10IT10=RR> was at 75.50 bps. It was at 63 bps in February before the attack on Iran and hit 103.62 in late March, the widest since June 2025.

(Reporting by Stefano Rebaudo; Editing by Jamie Freed and Alexander Smith)

((stefano.rebaudo@tr.com))