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

By Harry Robertson

LONDON, March 27 (Reuters) - Shorter-dated euro zone bond yields dipped on Thursday after U.S. President Donald Trump announced a 25% tariff on imported vehicles, a move that could dent the currency 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 as much as 5 basis points (bps) in early trading to 2.07%, its lowest since March 4. It was last down 4 bps at 2.08%.

Traders in money markets nudged up their bets on ECB interest rate cuts and last priced in a rate of 1.95% 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 announcement by Trump appears to be responsible for this morning's bull steepening of the Bund curve," said Lyn Graham-Taylor, senior rates strategist at Rabobank, referring to a fall in shorter-dated yields compared to longer-dated ones.

Germany's 10-year government bond yield DE10YT=RR, the benchmark for the euro zone bloc, initially fell 4 bps but was last 1 bp lower at 2.78%.

Italy's 10-year yield IT10YT=RR was also down 1 bp at 3.886%, and the gap between Italian and German 10-year yields DE10IT10=RR held broadly steady at 109 bps.

Economists said the German economy, which has flatlined over the last two years, could come under more pressure.

"Imports of finished cars and vehicles for transport (into the U.S.) amounted to $217 billion in 2024, or 6.6% of total goods imports," said Paul Ashworth, chief North America economist at Capital Economics.

Ashworth said 21% of those came from the European Union, "half of which came specifically from Germany".

Nonetheless, German 10-year yields remain around 40 bps higher for the month after a major overhaul of the country's spending rules that should boost growth and increase borrowing via bond markets.

The focus next week will be on the form Trump's long-promised reciprocal tariffs take on April 2.

France's 10-year bond yield FR10YT=RR traded broadly in line with peers, down 1 bp at 3.479%, after data showed the public sector budget deficit widened last year but not quite as much as the government had expected.