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

May 20 (Reuters) - Euro zone bond yields were little changed 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.

Germany's 10-year yield DE10YT=RR, the euro zone benchmark, was flat at 2.579%.

Two-year yields DE2YT=RR, which are more sensitive to changes in expectations for European Central Bank rates, fell 1 bp to 1.828%.

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. debt and a Moody's downgrade of the country's credit rating.

However, concerns about the U.S. fiscal position remained, Mohit Kumar, chief European economist at Jefferies, said.

U.S. President Donald Trump will join the congressional debate over his sweeping tax bill later on Tuesday, as Republicans who control the House of Representatives struggle to keep their fragile majority together for a crucial vote later this week.

"To me it's a long-term story, not a one-day story; we need to price in higher-term premia into the U.S. curve," Kumar said.

Term premium refers to the extra yield investors require for owning longer-dated rather than shorter-dated bonds.

As a result, Kumar said he was recommending investors be underweight on longer-dated U.S. Treasuries relative to shorter-dated European government bonds.

The U.S. 30-year Treasury yield US30YT=RR, which had risen on Monday to hit an 18-month high, was down 2 bps to 4.9193.

The yield on benchmark U.S. 10-year notes US10YT=RR was also down nearly 2 basis points at 4.4572%, after having reached 4.564% on Monday, its highest since April 11.

In the euro zone, preliminary May consumer confidence data 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 1.72% 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 traded 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 down nearly 1 bp to 3.595% IT10YT=RR, leaving the spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt – at 99 bps DE10IT10=RR

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.