Euro zone bond yields edge up, tariffs stay in focus

Updates with European midday trade

By Greta Rosen Fondahn

Jan 23 (Reuters) - Euro zone bond yields edged higher on Thursday, while investors awaited more certainty around U.S. President Donald Trump's trade policies and looked ahead to next week's central bank meetings.

Trump did not immediately impose tariffs on U.S. imports on his first day back in the White House, as some investors had been preparing for, but said he is mulling tariffs of around 25% on Canada and Mexico and around 10% on China from Feb. 1.

He has also vowed to impose duties on European Union imports.

The uncertainty surrounding tariffs has left investors in a wait-and-see mode, with Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, moving less than 1 basis point (bp) higher this week.

Ten-year Bund yields rose around 1 bp to 2.511% on Thursday. Yields move inversely to prices.

Yields jumped in the first weeks of the year in a global bond selloff over fears that tariffs could heighten U.S. inflation risks while the economy is already roaring ahead.

Germany's 10-year bond yield hit a seven-month high of 2.63% on Jan. 15, but then dropped sharply after core U.S. consumer price inflation came in below expectations.

"We see rates drifting lower over the coming months, but uncertainty over tariffs and inflation will prevent a significant rally," said Mohit Kumar at Jefferies.

Italy's 10-year yield IT10YT=RR was up 2 bps to 3.623% on the day, while the gap between Italian and German yields DE10IT10=RR stood at 110.4 bps.

U.S. 10-year Treasury yields US10YT=RR were also up, rising 3 bps to 4.6314%.

Markets expect the European Central Bank will cut interest rates by 25 bps next week, while the U.S. Federal Reserve is seen holding rates steady.

Traders currently price in around 95 bps in rate cuts from the ECB this year. EURESTECBM8X9=ICAP

Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, was 1 bp higher at 2.248%.

Later on Thursday, euro zone consumer confidence data may provide clues on the outlook for the European economy.

"The outcome deserves monitoring because private consumption is expected to increasingly contribute to growth this year as real incomes recover to their pre-pandemic levels," said UniCredit analysts in a note.