German 10-year bond yields keep below one-week highs ahead of US data

German 10-year bond yields held below one-week highs on Friday and Italian 10-year yields floated around the psychologically important 1 per cent level ahead of U.S. jobs data that is expected to set the tone of the session.

Risk-appetite was subdued on Friday after U.S, president Donald Trump ratcheted up tensions with China by banning transactions with popular apps WeChat and TikTok. Meanwhile rising coronavirus cases across the world are triggering fears of a second wave of lockdowns.

A U.S. financial stimulus plan which might support economic recovery expectations in the United States and globally made little progress.

"The markets will be paying close attention to the noises from Capitol Hill. Apparently, negotiations towards another stimulus package made progress lately, but more needs to be done before a deal can be agreed," DZ Bank strategist Andy Cossor told clients.

Safe-haven German bond yields were unchanged at -0.53 per cent in early Friday trade, holding below one-week highs at -0.49 per cent hit on Thursday.

Italian 10-year bond yields were up 1 basis point to 1.00 per cent, near their lowest since early March..

Southern European government bonds have rallied as European assets have become more appealing to investors after the approval by the European Union of a 750 billion euro recovery fund, while ECB measures continue to be in place.

Italy's liabilities towards other euro zone central banks fell in July, from record highs in June, the Target2 reading -monitored as a sign of financial stress and imbalances - showed on Friday.

But the focus is on U.S. non-farm payroll data due at 1230 GMT, which are expected to confirm whether there is a slowdown in the labour market's recovery as a resurgence in coronavirus infections has hampered efforts to reopen the economy.

"The non-farm payrolls component will be closely studied for signs that the U.S. economy is bouncing back after coronavirus-induced restrictions were eased, said DZ Bank's Cossor.

In any case "a major beat seems required to push USTs (U.S. Treasuries) and Bunds lower though with the current safety bid", Commerzbank's head of interest rate strategy Michael Leister said.

Germany's manufacturing economy continued its recovery from the coronavirus lockdown for the second consecutive month in June, with output rising 8.9 per cent, helped by a 14.9 per cent jump in exports, data showed on Friday.

Meanwhile a market gauge of long-term euro zone inflation rose above 1.2 per cent for the first time since mid-February.