Euro zone bond yields drop as Trump slaps new tariffs on autos

LONDON, March 27 (Reuters) - Euro zone bond yields fell on Thursday after U.S. President Donald Trump announced a 25% tariff on imported vehicles, a move that could dent the bloc's economy given Germany's focus on car-making.

Germany's 2-year bond yield DE2YT=RR, which is sensitive to European Central Bank interest rate expectations, fell 5 basis points (bps) in early trading to 2.07%, its lowest since March 4.

Traders in money markets added to their bets on ECB interest rate cuts and last priced in a rate of 1.94% by the end of the year, compared with 1.98% on Wednesday. Rates currently stand at 2.5%.

The new levies on cars and light trucks will take effect on April 3, the day after Trump plans to announce reciprocal tariffs aimed at the countries responsible for the bulk of the U.S. trade deficit.

"The escalation risks further dampening growth in several countries through cost increases and generally increased uncertainty," said Daniel Bergvall, head of economic forecasting at SEB.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, fell 4 bps to 2.755%.

Italy's 10-year yield IT10YT=RR was lower by 3 bps at 3.869%, and the gap between Italian and German 10-year yields DE10IT10=RR held broadly steady at 109 bps.