Euro zone bond yields slip as traders eye US data

By Lucy Raitano

LONDON, May 15 (Reuters) - Euro zone bond yields slipped on Thursday as traders await key U.S. data due later in the session for a steer on the world's biggest economy, while relief on easing trade tensions faded, pushing some flows into fixed income.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, was down 2 basis points (bp) to 2.674%, though it remained close to a multi-week high of 2.7% hit on Wednesday.

German 2-year yields DE2YT=RR, more sensitive to changes in expectations for European Central Bank policy, were off 3 bps at 1.911% while Italy's 10-year yield fell 1 bp to 3.703% IT10YT=RR.

Markets are betting on a 25-bps cut at the European Central Bank's next meeting in June IRPR.

"We pulled back a bit but fundamentally I think we have an upward pressure on rates," Mohit Kumar, chief economist and strategist for Europe at Jefferies, said.

"That said, to me it's more about a U.S. story rather than a European story, of course bunds trade in tandem with treasuries ... the biggest driver for bund yields is actually not European domestics right now, it's much more external factors," Kumar said.

Closely-watched U.S. data due later on Thursday includes April retail sales and jobless figures.

The figures will give investors an insight into the state of the U.S. economy amid worries about U.S. President Donald Trump's tariffs announced six weeks ago which traders fear are driving U.S. inflation and raising the risk of a global recession.

A relief rally spurred by a U.S.-China truce on Monday has faded. Even so, the S&P 500 is now above where it was before April 2.

"There seems to be a mispricing, it's odd that equities are higher now than where they were before Trump announced the tariffs," Richard McGuire, head of rates strategy at Rabobank, said. The effective tariff rate is still notably higher than it was before April 2, he added.

"The de-escalating of the trade war to our mind doesn't address what we believe to be the key element here... you don't need to worry about the details of the policy making, but the volatility."

"The policymaking itself is generating considerable uncertainty and to our minds this uncertainty has not been dispelled by the de-escalation" McGuire said.

Elsewhere, official figures showed Britain's economy grew by a better-than-expected 0.2% in March, while Q1 GDP figures for the euro zone showed the economy grew slower than initially estimated, but employment held up well.

Traders are also digesting data showing euro zone industrial output unexpectedly surged in March.

The spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt – was at 100.20 bps DE10IT10=RR, after reaching 93.80 on Tuesday, its lowest since April 2021.