Euro area bond yields rise, US debt, trade talks in focus

By Linda Pasquini and Stefano Rebaudo

May 20 (Reuters) - Euro zone government bond yields rose on Tuesday, tracking moves in U.S. Treasuries, as investors worried about the U.S. debt load and remained on the lookout for further trade deals from the world's biggest economy.

Germany's 10-year yield DE10YT=RR, the euro zone benchmark, climbed 3 basis points to 2.61%.

Longer-dated Treasury yields rose on concerns that a U.S. tax bill will increase the debt load, with the yield on benchmark U.S. 10-year notes US10YT=RR up 2 bps at 4.489%.

U.S. President Donald Trump will join the congressional debate over his 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," said Mohit Kumar, chief European economist at Jefferies.

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.

However, markets were also selling short-dated German bonds on Tuesday, with German two-year yields DE2YT=RR - more sensitive to changes in expectations for European Central Bank rates - up 2 bps at 1.85%.

Bond yields move inversely with prices.

In the euro zone, consumer confidence rose in May, while German April producer prices 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 are pricing in an ECB deposit rate of 1.74% by the end of 2025 EURESTECBM5X6=ICAP, with the next cut expected to come in June.

Italy's 10-year yield was up 3 bps to 3.63% 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 a poor auction result added to concerns about demand for the debt.