Euro zone government bond yields fell on Monday as recession fears in the euro area overshadowed expectations of a quicker U.S. monetary tightening after robust jobs data.
French Finance Minister Bruno Le Maire said on Sunday the French government was preparing for a total cut-off of Russian gas supplies, which it sees as the most likely scenario in its planning.
Germany has moved to stage two of a three-tier emergency gas plan, warning of recession if Russian gas flows are halted.
U.S. Treasury yields fell in early London trade after jumping on Friday when data showed that employers added more jobs than expected, boosting expectations the Federal Reserve will hike rates by another 75 basis points (bps).
The 10-year yield was down 3 bps to 3.069%.
Germany's 10-year government bond yield, the euro zone benchmark, fell 4 bps to 1.304%. It hit a 5-week low at 1.072% last week.
Investors await the U.S. inflation report on Wednesday, which could force another super-sized hike in rates.
Commerzbank analysts noted that front-loaded Fed tightening was also spilling over to euro short-term rate (ESTR) forwards, with the market pricing in more than 25 bps in European Central Bank (ECB) rate hikes this month and another 50 bp in September.
ESTR forwards for 2023 remain lower on the week given euro area recession fears.
"A crucial litmus test for the tightening pattern could come much earlier, though, with the planned end of the Nord Stream 1 maintenance targeted to end one day after the ECB lift-off decision," the Commerzbank analysts said in a research note.
The biggest pipeline carrying Russian gas to Germany started annual maintenance on Monday, with flows expected to stop for 10 days, but governments, markets and companies are worried the shutdown might be extended due to war in Ukraine.
Italy's 10-year government bond yields fell 4 bps to 3.33%, with the spread between Italian and German 10-year yields widening to 202 bps.
Investors expect the spread to remain around 200 bps before the announcement of the ECB's so-called anti-fragmentation tool expected at its next policy meeting.
ECB policymakers pledged to buy more bonds from debt-laden countries such as Italy to contain a widening spread between their borrowing costs and Germany's that might hamper monetary policy transmission across the bloc.
Bundesbank chief Joachim Nagel disagreed with that decision and warned against trying to decide the right market spread as that was "virtually impossible" and risked making governments complacent, according to sources at the meeting.
ECB aid to tackle rising government debt yields in some euro zone countries should come with conditions, an adviser to German Finance Minister Christian Lindner said.
(Reporting by Stefano Rebaudo Editing by Mark Potter)