Euro zone bonds outshine U.S. Treasuries amid Trump's Fed rebuke

By Yadarisa Shabong

April 22 (Reuters) - Euro zone government bond yields dipped on Tuesday, continuing to outperform 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 it 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.

Investors are fearful of a deep hit to U.S. asset prices if Trump attempts to fire Powell.

German 10-year bond yields DE10YT=RR, the benchmark for the euro zone bloc, were last down 2 basis points at 2.45%, having been closed on Monday for Easter.

U.S. 10-year Treasury yields were down around 1 basis point at 4.39%, but that was after an 8 bp rise on Monday. US10YT=RR

At 194 bps, the premium that investors demand to hold U.S. 10-year Treasuries rather than German Bunds DE10US10=RR has increased by around 47 basis points so far in April, heading for its biggest monthly rise since July 2003, according to LSEG data.

Money has been reallocated 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.

The bank's Survey of Professional Forecasters suggested on Tuesday that euro zone inflation could be a touch higher this year than earlier thought, but would then stabilise at the ECB's 2% target.

Meanwhile, the German government foresees inflation falling to 2% this year and to 1.9% next, a source told Reuters .

France's 10-year bond yield was last down around 1 basis point at 3.22% FR10YT=RR. It briefly nudged up after Bloomberg News reported President Emmanuel Macron was considering fresh snap elections as ealy as the autumn, but the move did not hold.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, dropped to its lowest since October 2022, dipping to 1.622%. It was last down around 1 bp at 1.66%.

Markets are currently pricing in the ECB's main rate at roughly 1.60% in December, up slightly from the roughly 1.57% seen on Thursday. EURESTECBM6X7=ICAP

Italy's 10-year yield IT10YT=RR was down 2 bps at 3.62%.

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