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Euro zone yields drop after weak U.S. jobs data spurs rate cut hopes

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Updates after U.S. jobs data

By Harry Robertson and Stefano Rebaudo

May 3 (Reuters) -Euro zone bond yields fell sharply on Friday after data showed the U.S. labour market was much weaker than expected in April, raising hopes for interest rate cuts.

Nonfarm payrolls data showed the U.S. labour market added 175,000 jobs in April, down from 315,000 in March and well below the 243,000 increase economists expected.

Bond yields fell across the board as investors bet the numbers would make the Federal Reserve more likely to lower borrowing costs this year and make other central banks feel more comfortable in doing the same.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was last down 10 basis points (bps) at 2.456%, having traded at 2.534% just before the figures were released. Yields move inversely to prices.

Yields were on track to end the week sharply lower after the Fed held interest rates on Wednesday and Chair Jerome Powell said another hike was unlikely. He suggested rate cuts remain on the table, albeit likely later than expected after a run of strong economic data.

The 10-year U.S. Treasury yield US10YT=RR, which sets the tone for borrowing costs around the world, was last down 10 bps at 4.469%.

Investors expect the European Central Bank will be able to cut interest rates more than the Fed this year, given the euro zone's weaker growth and cooler inflation. However, the power of the U.S. economy means policymakers could be reticent to stray too far from the Fed's path.

Italy's 10-year yield IT10YT=RR was 11 bps lower at 3.759%, from 3.85% before the U.S. data.

The gap between Italian and German 10-year yields DE10IT10=RR - a gauge of the risk premium investors ask to hold bonds of the euro area's most indebted countries - was down 2 bps at 129 bps, its lowest level since March.

Market participants will focus on Fitch's review of Italy's credit rating after the European market closes.

"A negative outlook seems possible today, but we consider it more likely that the rating agency will wait until more clarity on the next budget emerges," said Christoph Rieger, head of rates and credit research at Commerzbank.

He added that the Italian spread recently tightened "defying fundamental impulses."

Reporting by Harry Robertson and Stefano Rebaudo; Editing by Mark Potter, William Maclean


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