UPDATE 2-Investors shed Bunds as ECB fortifies euro zone, US unemployment falls

* German 30-year yields rise to five-month high

* Long-end Italy/Germany spread at tightest since March

* U.S. payroll numbers show 2.5 mln jobs added

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds comment and latest news on US unemployment figures)

By Abhinav Ramnarayan and Olga Cotaga

LONDON, June 5 (Reuters) – Safe-haven German government bonds sold off for a second day on Friday, with yields reaching their highest levels in months, after the European Central Bank’s support for the euro zone helped boost sentiment towards the wider region.

Southern European borrowing costs fell further and the gap between long-dated Italian and German bond yields shrunk to its narrowest since the first coronavirus-related market rout in late March.

The ECB approved a bigger-than-expected expansion of its stimulus package on Thursday to prop up an economy plunged by the coronavirus pandemic into its worst recession since World War Two.

“If you think about what the ECB has done, it is dramatically supporting the euro through reducing tail risk. Peripheral spreads will keep tightening, especially at the long end,” said Peter Chatwell, Mizuho’s head of rates.

The gap between Italian and German 30-year bond yields was at its narrowest since March 27, at 167 basis points.

German 10-year Bund yields rose 6 bps to -0.257%, the highest since March 25, buoyed also by a drop in the U.S. jobless rate to 13.3% last month from 14.7% in April, in spite of economists predicting it would rise.

Employment data from the United States also showed over 2.5 million jobs being added, an improvement from a dire figure the month before and adding to the positive sentiment.

Data “suggests the American economy can bounce back very vigorously and we all need to massively revise up our economic projections,” said James Knightley, chief international economist at ING.

“The rebound in hiring should continue, particularly as consumer-orientated retail and hospitality-related industries continue to re-open,” he said, adding that nonetheless “caution is still warranted.”

Thirty-year German government bond yields rose 8 bps to 0.259%, after touching 0.277%, the highest level since Jan. 21. The bonds were trading at a negative yield just 10 days ago.

“Yesterday, Christine (Lagarde) fired yet another bazooka – almost doubling the size of the purchase programme. That means a lot of support for Italy,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham.

Italy’s benchmark 10-year bond yields were up 1 bps at 1.43% on Friday, close to Thursday’s two-month low and half of mid-March’s level, when worries around the spread of the novel coronavirus were at their most elevated.

Greek 10-year yields were also at their lowest levels since March at 1.35%.

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