Euro zone bonds yields nudge higher, trade deals, cen banks in focus

By Stefano Rebaudo and Lucy Raitano

May 8 (Reuters) - Euro zone government bond yields rose on Thursday, as investors digested a raft of developments including a trade deal between the U.S. and Britain and a Bank of England rate cut.

U.S. President Donald Trump and British Prime Minister Keir Starmer on Thursday announced a "breakthrough deal" on trade that leaves in place a 10% tariff on goods imported from the UK while Britain agreed to lower its tariffs to 1.8% from 5.1% and provide greater access to U.S. goods.

The deal, which had been trailed since the morning, broadly supported global share markets and weighed on safe-haven bonds. MKTS/GLOB

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, rose 4 bps to 2.51%. It hit 2.556% on Tuesday, its highest level since April 14.

Central banks were also in the mix globally with spillovers into euro zone bonds. The Bank of England on Thursday cut rates by 25 basis points, but markets were surprised by two policy makers voting to keep rates unchanged.

UK gilt yields spiked higher on the news, with the policy-rate sensitive 2-year GB2YT=RR up 12 basis points (bps) at 3.93% reacting as some investors had bet the BoE would signal more quick rate cuts.

"We expected a cautious commitment to further easing ...Instead, the statement was undeniably more hawkish with the main surprise being the vote split with two members calling for unchanged rates," said Steve Ryder, senior portfolio manager at Aviva Investors.

Also in the mix, the Federal Reserve held interest rates steady on Wednesday but said those risks clouded the U.S. economic outlook as policymakers grapple with the impact of Trump's tariffs.

"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.

These global developments largely outweighed European factors for bonds on Thursday.

Money markets priced in a European Central Bank deposit facility rate at 1.6%. It fell 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 4 bps to 1.77%.

Italy's 10-year yield was up 3 bps at 3.59% 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 103 bps. DE10IT10=RR