Euro zone yields outperform US Treasuries after Trump's Fed criticism

By Yadarisa Shabong

April 22 (Reuters) - Euro zone government bond yields eased on Tuesday, outperforming U.S. Treasuries, as traders sought the safety of European bonds after U.S. President Donald Trump's attack on the Federal Reserve raised questions about whether the Fed can maintain its independence.

Trump said on Monday that domestic growth could slow unless the Fed cut interest rates immediately, triggering a sell-off in long-dated Treasuries.

Trump repeated his criticism of Fed Chair Jerome Powell, who says rates should not be lowered until it is clearer that Trump's tariff plans will not lead to a persistent rise in inflation.

German 10-year bond yields DE10YT=RR, the benchmark for the euro zone bloc, eased 0.9 basis points to 2.457%. U.S. 10-year Treasury yields rose to 4.418%.

At 195 bps, the premium that investors demand to hold U.S. 10-year Treasuries rather than German Bunds DE10US10=RR has increased by 48 basis points so far in April, heading for its biggest monthly rise since June 2003, according to LSEG data.

Investors have been reallocating money away from the U.S. in the past month because of Trump's tariff policies, and European assets have benefited.

SAFE HAVEN OPTION

"Europe and the ECB are emerging from this trade war ... with their reputation really enhanced relative to the United States as a safe haven option," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

Europe's appeal has been "enhanced by the harm that the U.S. is inflicting on itself", he said, adding that there was no reason for the German-U.S. spread to turn around for the time being.

Traders returning from the long weekend were also reassessing their outlook for the economy after the European Central Bank's rate cut last Thursday and comments that U.S. tariffs would knock growth.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, extended its slide on Tuesday to its lowest since October 2022 at 1.622%. It was last down 2.5 bps at 1.653%.

It had dropped about 7 bps on Thursday as investors priced in more rate cuts after the ECB cut its key interest rate by a quarter-point to 2.25% last week.

Trading resumed on Tuesday after Easter market holidays on Friday and Monday.

Markets are currently pricing in the ECB's main rate at roughly 1.6% in December, up slightly from the roughly 1.57% seen on Thursday. EURESTECBM6X7=ICAP

Italy's 10-year yield IT10YT=RR was steady at 3.64%.

Investors will also have their eye on euro zone consumer confidence flash data for April later in the day, which is expected to show a drop in confidence.

Later this week, preliminary surveys of euro zone business activity for April will offer the first evidence of the U.S. tariffs' effect on corporate sentiment.