Euro zone bond yields rise as tariff optimism offers respite to risky assets

By Yadarisa Shabong

March 25 (Reuters) - Euro zone bond yields rose on Tuesday as traders piled into risky assets on signs of flexibility in the next round of U.S. tariffs and stronger-than-expected U.S. data, while improved business morale in Germany also helped.

European bond markets took some cue from U.S. markets overnight after U.S. President Donald Trump indicated on Monday that not all of his threatened levies would be imposed on April 2 and that some countries may get a break.

Markets saw that as a sign of flexibility, leading to a rally in U.S. stock markets on Monday and a selloff in U.S. bonds. Yields move inversely to prices. US/

An unexpectedly strong reading for the U.S. services sector in S&P's PMI index for March, which came in higher than the consensus and showed a clear expansion in the final month of the first quarter, has also helped sentiment for risky assets.

The German 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose to a one-week high of 2.819%, up 4.6 basis points.

"The flexibility comments from Trump, they're clearly ... helping. I think the strong U.S. data from yesterday is probably bleeding through into our session as well," said Peter Schaffrik, global macro strategist at RBC Capital Markets.

Meanwhile, German business sentiment rose, as expected, this month, a survey from the Ifo institute showed on Tuesday, as companies expect a recovery after two years of contraction in Europe's largest economy.

The data offered a measure of the business outlook after Germany passed a landmark bill to massively boost infrastructure and defence spending, a move seen as a positive for euro zone growth in the next few years.

Italy's 10-year yield IT10YT=RR was higher by 3.1 bps at 3.911%, and the gap between the Italian and German 10-year bonds DE10IT10=RR stood at 109 bps.

The European Union has threatened to impose retaliatory measures from next month against goods from the United States after the U.S. put in place duties on steel and aluminium products from around the world earlier this month.

The U.S. has said it will review its trade relationship with the European Union.

UBS estimates that a 10% US tariff could lower euro area GDP growth by 0.1-0.3 percentage points over a year, while a 25% tariff could lower GDP by 0.3-0.7pp, with a significant degree of uncertainty depending on EU retaliation, FX adjustments, confidence effects and other things, Reinout De Bock, head of European rates strategy at UBS said.

On Tuesday, ECB policymaker Peter Kazimir said he was open to discussing whether to cut interest rates further or pause at the bank's next meeting in April.

Markets priced in a ECB depo rate at roughly 2% at the end of 2025 EURESTECBM6X7=ICAP.

Germany's 2-year bond yield DE2YT=RR, which is sensitive to ECB policy rates, was 2.7 bps higher at 2.153%.