Euro zone bond yields hit fresh one-month highs

By Medha Singh

May 13 (Reuters) - A selloff in euro zone bonds continued on Tuesday as investors pared back bets on interest rate cuts by the European Central Bank after a faster-than-expected de-escalation in the U.S.-China trade war eased worries about a sharp global slowdown.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, rose 3.4 basis points (bps) to 2.671%, while the two-year yield DE2YT=RR, more sensitive to ECB policy rates, was up 1.9 bps at 1.94%. Both were at levels last seen on April 10.

Traders now expect the ECB deposit facility rate to be at 1.81% by year-end, up from 1.67% late Friday. The deposit rate is currently at 2.25%.

Euro zone bonds sold off alongside other safe-haven assets on Monday after weekend talks between U.S. and Chinese negotiators yielded a 90-day pause in their tit-for-tat trade dispute and sharply lowered the tariffs the world's top two economies had imposed on each other.

"There's very clearly upside risk for the broader risk asset spectrum now as markets will likely extrapolate a higher likelihood of further deals in the coming weeks," said Max Kettner, chief multi-asset strategist at HSBC.

Longer-dated bonds were hit harder on Tuesday, with yields on the 30-year German bond DE30YT=RR up 4.6 bps at 3.13%.

The European Commission is analysing the trade deal struck last week between the United States and Britain for implications for the bloc and global trade, European Economic Commissioner Valdis Dombrovskis said on Monday.

German investor morale rose more than expected in May, recovering from its sharp decline the previous month, the ZEW economic research institute said.

All eyes will be on the U.S. Consumer Price Index for April due at 1230 GMT, which could show the economic impact of the trade war on U.S. consumers.

"Even if some of the hard data surprises negatively in the coming weeks, markets may well shrug that off as being driven by the 'pre-China-tariff' world and thus no longer relevant," Kettner said. "Continued resilience in the hard data or even upside surprises on the other hand would likely be taken as a positive - a classic win-win situation."

Italy's 10-year yield rose 3.2 bps to 3.71% IT10YT=RR, leaving the spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt - at 102 bps. DE10IT10=RR

The European Central Bank will stand by its aggressive stimulus policy of the last decade in a strategy review, side-stepping calls for self-criticism after a bout of high inflation and sizeable losses, several ECB policymakers told Reuters.

The review, which began in March, will address some big questions about the way the ECB works. The document is likely to be finalised in early summer.

In a busy day for bond issuance, there is new supply coming in from the euro zone, Germany, Italy and the Netherlands, according to LSEG IFR.