* U.S. jobs data overshoot forecasts, making rate hike more likely
* Spain 10-year bond yields reach highest level since June 2016
* German 10/2-yr bond yield gap widest since July 2014
* Japanese investors sell French bonds, buy German debt
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Writes through.)
By Dhara Ranasinghe and Abhinav Ramnarayan
LONDON, March 8 (Reuters) - Euro zone government bond yields shot up on Wednesday, helped by U.S. jobs data that beat expectations and made it more likely the Federal Reserve will raise interest rates at its meeting next week.
U.S. private employers added 298,000 jobs in February, according to a report by a payrolls processor on Wednesday, well above economists’ expectations, pushing U.S. Treasury yields higher.
“The hike is now priced in and I fully expect it unless there is very disappointing data between now and next week,” said Mizuho strategist Antoine Bouvet.
“Apart from the hike, it is also going to be about whether the Fed decides it is behind the curve and needs to step up the pace of hikes. The language will be watched very closely,” he said.
Thomson Reuters data shows the futures market is pricing in an 85 percent probability of a 25-basis-point increase at the March 15 meeting.
Euro zone government bond yields rose across the board, led by Spain’s 10-year government bond, which rose 10 basis points to a high of 1.83 percent, its highest since June 2016.
Most other euro zone bond yields were up 5 to 9 basis points.
The European Central Bank is due to meet on Thursday, and though it is expected to maintain its ultra-loose monetary policy stance, investors will watch for hints that recent strong euro zone inflation reports will affect future policy.
German government bond yields had already risen on Wednesday, pushed higher after lacklustre demand at a sale of five-year debt.
Germany, the euro zone’s benchmark bond issuer, sold about 3.16 billion euros of bonds maturing in April 2022. The auction attracted 3.4 billion euros worth of bids, less than the 4 billion euros offered.
“It was a poor auction this time around and you see that in the market reaction,” said Commerzbank rates strategist David Schnautz. “We know the ECB is keen on buying much shorter-dated debt, so that may have tipped the balance against five-year paper.”
Germany’s five-year bond yield was up 6 basis points at minus 0.51 percent.
Analysts said they expected demand for German government bonds to bounce back.
Worries about the euro zone’s future as elections in the Netherlands and France loom, demand for top-rated bonds for use as collateral in funding markets and the ECB’s bond-buying have all underpinned demand for German bonds in recent weeks.
Data released by Japan’s Ministry of Finance on Wednesday showed Japanese investors were net buyers of about 5.4 billion euros of German sovereign bonds in January, the largest amount since October 2014.
At the same time, Japanese investors sold French bonds for the third month in a row, the longest such spell since mid-2011 .
France’s 10-year bond yield rose to a two-week high at around 1.04 percent FR10YT=TWEB, pushing the gap over German peers to around 68 bps -- its widest in a week.
Reporting by Dhara Ranasinghe and Abhinav Ramnarayan; Editing by Larry King