European bond yields dip as US debt load falls out of the spotlight

May 20 (Reuters) - Euro zone bond yields edged down on Tuesday as investors moved past Monday's worries around the U.S. debt load and were on the lookout for further trade deals from the world's biggest economy.

Bonds traded more steadily after a volatile session on Monday, dominated by a steep rise in U.S. Treasury yields on concerns around the potential impact of tax cutting proposals on the U.S. fiscal position and a Moody's downgrade of the U.S. credit rating.

Germany's 10-year yield DE10YT=RR, the euro zone benchmark, was down 1.6 basis points at 2.562%.

Two-year yields DE2YT=RR, which are more sensitive to changes in expectations for European Central Bank rates, fell 2 bps to 1.816%.

Preliminary May consumer confidence data for the euro zone is expected later in the day after German April producer prices this morning recorded a 0.9% decline on the year.

The ECB is on track to get inflation back to its 2% target, but new challenges including around a global trade war may push up prices further out, so the bank should stop easing policy, ECB board member Isabel Schnabel said on Tuesday.

Money markets were pricing in an ECB deposit rate of 1.71% by the end of 2025 EURESTECBM5X6=ICAP, with the next cut likely to come in June.

With a thin calendar of events in Europe and elsewhere, except for speakers from the Federal Reserve, the European Central Bank and Bank of England throughout the day, investors awaited indications of trade deals on the way and returned to stocks, which opened higher in the European session.

"Today's calendar is light, keeping the focus on politics and central bank talk. We suggest buying Bund dips with 10-year yields above 2.6%," Christoph Rieger, chief rates strategist at Commerzbank said.

Italy's 10-year yield was up 1 bp to 3.612% IT10YT=RR. The spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt – was at 100 bps DE10IT10=RR, after narrowing to its tightest since April 2021 at around 94 bps last week.

European markets overlooked yields on long-dated Japanese government bonds soaring to a record high on Tuesday, after poor auction result added to existing concerns about demand for the debt.