Euro zone yields edge up as trade optimism eases economic concerns

By Medha Singh, Stefano Rebaudo

May 13 (Reuters) - Euro zone yields steadied on Tuesday after rising sharply the day before, when easing trade tensions reduced concerns about economic growth and led investors to scale back bets on European Central Bank interest rate cuts.

Weekend talks between U.S. and Chinese negotiators yielded a 90-day pause in their trade dispute and sharply lowered the tariffs that the world's top two economies had imposed on each other.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, rose 2.5 basis points (bps) to 2.66%, after reaching 2.68%, a fresh one-month high. It jumped 9 bps on Monday, in its biggest daily rise since early March when Germany announced plans for a massive increase in fiscal spending.

Goldman Sachs raised on Tuesday its forecast for the euro area's economic growth and said it now expects the ECB to reach a terminal rate of 1.75% in July, revising its previous forecast of 1.5% by September.

Traders now expect the ECB's deposit facility rate to be at 1.79% by the end of this year EURESTECBM5X6=ICAP, up from 1.67% late on Friday and from below 1.55% after the ECB suggested in mid-April it will cut rates in response to a possible tariff-induced economic slowdown.

They also price in an almost 95% chance of a rate cut in June and less than a 20% chance of a second easing in July.

U.S. 10-year Treasury yields fell briefly after Consumer Price Index for April data mostly came in below forecasts, showing only a moderate immediate impact of the sharp import tariff hikes announced by the Trump administration early last month.

The German two-year yield DE2YT=RR, more sensitive to ECB policy rates, was up one bp at 1.93%, after rising 13.5 bps on Monday.

"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.

GERMAN INVESTOR MORALE RISES

Longer-dated bonds were hit harder on Tuesday, with yields on the 30-year German bond DE30YT=RR up 3.5 bps at 3.12%.

The European Commission is analysing the trade deal struck last week between the U.S. 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 in April, the ZEW economic research institute said.

Italy's 10-year yield rose 2 bps to 3.69% IT10YT=RR, leaving the spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt - at 100 bps. DE10IT10=RR

The ECB 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 central bank works. The document is likely to be finalised early this 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.