Euro zone bonds little changed after BoE, UK yields rise

May 8 (Reuters) - Euro zone government bond yields edged a touch higher on Thursday, roughly unchanged after the Bank of England after cut rates and suggested it needed to adjust policy gradually.

UK gilt yields rose, with the policy-rate sensitive 2-year GB2YT=RR up 7 basis points (bps) at 3.88% as some investors had bet the BoE would signal more quick rate cuts.

"Heightened trade policy uncertainty poses the risk of stagflation," Vivek Paul, UK chief investment strategist at BlackRock Investment Institute.

"News today of a U.S.-UK trade deal underscores our view that U.S. tariffs are likely to have a limited direct impact on UK gross domestic product," he added.

U.S. President Donald Trump is expected to announce a trade deal between the U.S. and Britain on Thursday, the New York Times reported on Wednesday.

Some analysts recently argued the BoE could end up more hawkish than expected as hard economic data shows no signs of a deteriorating outlook and the impact of tariffs will be small since the UK has limited exposure to U.S. goods demand.

Euro area borrowing costs were tracking U.S. Treasuries after the U.S. Federal Reserve warned on Wednesday about the risks of higher inflation and unemployment.

The Fed held interest rates steady on Wednesday but said those risks clouded the U.S. economic outlook as policymakers grapple with the impact of President Donald Trump's tariffs.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, rose 2.5 bps to 2.50%. It hit 2.556% on Tuesday, its highest level since April 14.

"While the Fed sees increased risks to both employment and inflation, this assessment is probably obvious given the tariff backdrop," said Hauke Siemssen, rate strategist at Commerzbank.

"More insightful were (Fed chair Jerome) Powell's remarks that there is no real cost to waiting as the labour market is still doing well while inflation has come down," he added, arguing that markets did not interpret this as overly hawkish.

U.S. Treasury yields rose, with the 10-year US10YT=RR up 3.5 bps at 4.31% after dropping the day before.

Money markets priced in a European Central Bank deposit facility rate at 1.6% after falling to below 1.55% in mid-April as the ECB suggested it was ready to cut rates in response to the potential adverse impact of U.S. tariffs.

German 2-year yields DE2YT=RR, more sensitive to European Central Bank policy rates, rose 3.0 bps to 1.75%.

Italy's 10-year yield was up 2.0 bps at 3.58% IT10YT=RR, leaving the spread between it and Germany's Bund yield – a market gauge of the risk premium investors demand to hold Italian debt – at 105 bps. DE10IT10=RR