UPDATE 3-German bond yields rise with U.S. job data not quite as bad as expected

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites top to add U.S. employment data, updates prices)

By Stefano Rebaudo and Yoruk Bahceli

MILAN, Aug 7 (Reuters) – Germany’s 10-year borrowing costs rose on Friday, tracking U.S. Treasury yields higher, after U.S. employment data showed employment growth slowed considerably in July but not quite as much as economists had expected.

High-grade euro zone government bond yields rose 2-3 basis points across the board, after U.S. Treasury yields ticked up on the back of the non-farm payroll data.

But risk-appetite remained subdued 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 a couple of basis points higher at -0.51% by Friday’s close, though still within touching distance of a 2-1/2 month low of -0.561% hit a week ago.

Italian 10-year bond yields were up 1 basis point at 1.00%, but still near their lowest since early March..

Southern European government bonds have rallied as European assets 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.

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

Meanwhile a market gauge of long-term euro zone inflation rose above 1.2% for the first time since mid-February. (Reporting by Stefano Rebaudo and Yoruk Bahceli, Additional reporting by Abhinav Ramnarayan; Editing by Timothy Heritage and Alison Williams and Kirsten Donovan)

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