German bonds rally as tariff fears drive investors to safe havens

By Harry Robertson

LONDON, March 31 (Reuters) - German bonds rallied on Monday, sending benchmark yields to their lowest in almost a month, as investors flocked to the safety of government debt ahead of U.S. President Donald Trump's April 2 tariff deadline.

Trump has said he will announce reciprocal tariffs on U.S. trading partners on Wednesday, potentially overhauling the global trading system. Global equities and stock futures fell sharply .MIWD00000PUS on Monday and the Japanese yen JPY=EBS climbed as investors moved out of riskier assets into those deemed to be safe havens.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, fell to 2.659% in early trading, its lowest since March 5, and was last down 4 basis points (bps) at 2.692%. Yields move inversely to prices.

"It's all about the tariff uncertainty and how many tariffs and counter-measures will be announced," said Mohit Kumar, a senior economist at Jefferies.

"The negative scenario for the market would be that April 2 just marks the starting point of negotiation, and we have an extended period of negotiations where there is not much clarity on the tariff structure."

Also on the radar of investors was inflation data from across the euro zone. Monthly price growth slowed in Germany's three most populous states in March, figures showed, while Italian inflation picked up slightly more than expected.

Data for Germany as a whole is due later in the day, ahead of the euro zone figures on Tuesday.

Germany's two-year bond yield DE2YT=RR, which is sensitive to European Central Bank (ECB) rate expectations, fell to 1.971%, the lowest since mid-December, and was last down 4 bps at 1.984%.

Traders on Monday added to their bets on ECB rate cuts this year, money market pricing showed. They now expect the ECB's main rate to fall to around 1.84% by year-end, down from 1.88% on Friday.

TARIFFS

Trump said on Sunday that reciprocal tariffs will include all nations. He is also urging senior advisers to take a more aggressive stance on tariffs, the Washington Post reported on Saturday.

Separately, Trump over the weekend threatened secondary tariffs on Russian oil over his frustrations about the speed of talks on the Ukraine war.

ECB President Christine Lagarde reiterated on Monday her forecast that U.S. tariffs and Europe's counter-measures would knock euro zone growth down by around 0.5 percentage points in the first year after the levies are applied.

Italy's 10-year yield IT10YT=RR, the benchmark for so-called periphery countries, were down 2 bps at 3.828%. The closely watched gap between Italian and German yields DE10IT10=RR widened slightly to 112 bps.

French 10-year bond yields FR10YT=RR were down 2 bps at 3.412%. They were little moved by news that far-right leader Marine Le Pen had been found guilty of misappropriating European Union funds, in a trial that could potentially bar her from the 2027 presidential race.