Euro zone bond yields edge up amid US-EU tariff negotiations
May 26, 2025 04:36 PM IST
By Stefano Rebaudo
May 26 - Euro zone government bond yields edged up on Monday as the U.S. backed away from its threat to slap 50% tariffs on European imports, easing fears of a sharp economic slowdown.
U.S. President Donald Trump restored a July 9 deadline to allow negotiations. A European Commission spokesperson said a phone call between European Commission President Ursula von der Leyen and Trump gave trade talks a new impetus.
The latest developments highlighted that Washington has not turned the page on tariff negotiation tactics, and more trade policy volatility lies ahead, analysts said.
Investors will closely watch remarks from European Central Bank President Christine Lagarde later in the session. The ECB policy meeting is expected to decide a rate cut of 25 basis points next week.
Germany's 10-year yield rose 1.5 bps to 2.59%, after dropping 6.5 bps on Friday.
Trading volumes on Monday are expected to be thinner than usual as markets in the U.S. and Britain are closed due to public holidays.
U.S. Treasury yields dropped on Friday as Trump's remarks raised concerns about slowing economic growth, but market participants fear that concerns about a growing fiscal deficit will keep borrowing costs at high levels.
"With the passage of the tax bill through the House, the focus is now on the changes as it makes its way through the Senate to alleviate the market concerns around the fiscal trajectory," ING strategists said in a research note.
Money markets priced in an ECB deposit facility rate at 1.69% by year-end, up from 1.67% late Friday. The pricing reached 1.55% after the ECB suggested in mid-April it could cut rates in response to a possible tariff-induced economic slowdown.
Money markets also indicated more than a 95% chance of a rate cut in June and a 20% chance of another easing in July.
German 2-year government bond yields, more sensitive to ECB policy rates, were up 4 bps at 1.80% after falling 7 bps on Friday.
Italy's 10-year yield was flat at 3.61%, after Moody's upgraded Italy's credit rating outlook to "positive".
The spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt – stood at 99 bps. It hit 90.90 bps last week, its lowest since February 2021.
