Euro zone bond yields fall as US tariffs loom, markets mull ECB rate outlook

By Lucy Raitano

LONDON, April 1 (Reuters) - Euro zone bond yields fell on Tuesday, as traders awaited details of U.S. President Donald Trump's reciprocal tariffs on Wednesday, while the latest inflation figures backed the market's expectation of a European Central Bank rate cut in April.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, was down 7 basis points (bps) to 2.659%, its lowest since early March.

Weaker-than-expected U.S. economic data added impetus to the move into safe government debt, with 10-year U.S. Treasury yields down 10 bps at 4.146% US10YT=RR.

Traders are bracing for Wednesday when Trump's reciprocal tariffs are expected to come into effect.

EU executive chief Ursula von der Leyen said on Tuesday the European Union had a "strong plan" to retaliate against tariffs imposed and which are set to be imposed by Trump, although it would prefer to negotiate a solution.

Italy's 10-year yield IT10YT=RR meanwhile hit its lowest level since March 5, slipping 9 bps to 3.768%.

The gap between Italian and German yields DE10IT10=RR narrowed slightly to 113 basis points.

Germany's interest-rate sensitive two-year bond yield DE2YT=RR was down 3 bps at 1.999%, while short-dated Italian bonds IT2YT=RR were 5 bps lower at 2.273%.

Traders were also mulling the ECB's next move at its April 16-17 meeting, with markets placing high bets of 85% on the chance of a 25 bps cut IRPR.

On Wednesday, Finnish central bank governor Olli Rehn told media company Politico that the ECB should cut interest rates in April if inflation keeps moving in line with its projection and more easing would keep price growth on track.

Data on Tuesday showed euro zone inflation eased as expected last month and a key measure of underlying price pressures also fell, likely adding to widespread expectations for another ECB interest rate cut later in April.

Final purchasing managers index surveys were also released, showing output rising for the first time in two years in the region's manufacturing industry.

Eurostat data on Tuesday showed unemployment falling to an all-time low of 6.1% in February.

"When you look at some of the other data, like the unemployment data... from that point of view you would be expecting a slightly different market reaction, so that's what leads me to the conclusion that it's probably the tariff story that is overpowering everything," said Peter Schaffrik, global macro strategist at RBC Capital Markets.