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.

Global stocks were slightly higher on Tuesday, after a sharp rally in the prior session on hopes U.S. President Donald Trump would take a more measured approach on tariffs than feared.

An unexpectedly strong reading for the U.S. services sector in S&P's PMI index for March, also helped sentiment for risky assets.

The German 10-year bond yield DE10YT=RR, the benchmark for the euro zone, rose to a one-week high of 2.831%, and was last up 2 basis points at 2.79%.

"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 up 1.5 bps at 3.90%, and the gap between the Italian and German 10-year bonds DE10IT10=RR stood at 108 bps.

The European Union has threatened to impose retaliatory measures from next month on 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 EU.

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

On Tuesday, European Central Bank 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 are pricing in a ECB deposit 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 1.5 bps higher at 2.14%.