Euro bond yields fall as traders mull tariffs, more ECB easing

Adds latest price moves, updates context, adds quotes

LONDON, Feb 3 (Reuters) - Euro zone bond yields fell on Monday after U.S. President Donald Trump announced tariffs on Canada, Mexico and China and threatened more on Europe, fuelling a move to safe-haven assets on fears of a trade war and lower global growth.

The prospect of Trump imposing tariffs on Europe is keeping the mood fraught, while soft euro services consumer inflation figures prompted traders to price in more easing from the European Central Bank.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro zone, was last down 6 basis points at 2.405%, while Germany's rate sensitive two-year yield DE2YT=RR was down 7 bps at 2.05%.

"On tariffs, the market is reading this as disinflationary, it sees this as a hit to economic growth in Canada and Europe," said Kenneth Broux, head of corporate research, FX and rates at Societe Generale.

Traders will be listening closely for more news around trade, after Trump said he would speak on Monday with the leaders of Canada and Mexico, and European Union leaders gathered to discuss the tariff news and defence matters related to Russia.

"He has said Europe would not escape tariffs, we are waiting for that. That’s the kind of market reaction, a flight to quality and favourable inflation data cements the case for ECB rate cuts and lower Bund yields," said Broux.

Market watchers were also digesting the latest euro zone inflation print, which showed prices accelerating slightly last month, but remaining on an anticipated course that could allow the ECB to cut rates further, possibly as soon as March.

It confirms soft inflation prints out of France and Germany on Friday.

On Monday, Slovak policymaker Peter Kazimir said interest rates have room to fall further given weak growth and a slowdown in inflation, but uncertainty is so high that any more precise guidance on rates would be unrealistic.

The ECB cut borrowing costs for the fourth straight meeting last Thursday.

The premium of 10-year German yields over two-year yields reached its largest since October 2022, as investors priced in the possibility of quicker ECB rate cuts amid a potential hit to the economy.

Elsewhere, Italy's 10-year yield IT10YT=RR was up 2 bps at 3.539%.

Mohit Kumar, chief economist and strategist for Europe at Jefferies, said in a note that tariff news was an FX and equities story rather than a rates one.

"Rates will struggle between the inflationary impact which would push rates higher and growth impact which would push them lower," wrote Kumar.

"If the tariff wars drag on, we should see a shift of ECB towards the dovish direction on growth concerns, but see limited impact on the Fed," he said.

The euro EUR=EBS headed for a 1.1% drop on the day on Monday to $1.0247, its largest daily fall since mid-December.