Bund yields drop, markets boost bets on ECB rate cuts after Trump's EU tariff plan

By Stefano Rebaudo

May 23 (Reuters) - Euro area government bond yields fell sharply and traders boosted bets on European Central Bank rate cuts on Friday after U.S. President Donald Trump said he was recommending a 50% tariff on goods from the European Union starting on June 1.

Trump cranked up his trade threats, targeting both smartphone giant Apple AAPL.O along with imports from the EU.

Germany's 10-year bond yield DE10YT=RR, the euro area's benchmark, was last down 7.5 basis points (bps) at 2.54%, and on track for the first weekly drop in over a month.

Money markets priced in the ECB deposit facility rate to be at 1.60% in December EURESTECBM5X6=ICAP from 1.72% before Trump's remarks. They also indicated a 90% chance of an ECB rate cut in June. The deposit rate is currently at 2.25%.

Euro zone government bond yields had been rising recently, tracking moves in U.S. Treasuries as fiscal concerns dominated market sentiment.

The Republican-controlled U.S. House of Representatives passed a sweeping tax and spending bill on Thursday that could saddle the country with trillions of dollars more in debt.

U.S. Treasury yields fell on Friday – with the 10-year US10YT=RR down 8 bps at 4.46% - after dropping on Thursday, as the recent selloff drew buyers at more attractive levels.

Data released early on Friday showed an upbeat picture about the euro area economy.

The German economy grew significantly more in the first quarter than previously estimated.

Meanwhile, negotiated wage growth in the euro zone slowed to 2.4% in the first quarter of 2025, data from the ECB showed on Friday.

"The gap between negotiated wages and the compensation per employee is a good proxy of labour market tightness and has been narrowing over the past year," said Citi economist Giada Giani.

"This confirms that remaining strength in pay growth is mostly explained by the catching-up to higher past inflation rather than reflecting current supply-demand imbalances in the labour market," she added.

German 2-year yields DE2YT=RR, more sensitive to ECB policy rates, were down 8.5 bps at 1.75%.

Focus is also on Moody's and Scope's reviews of Italy's credit rating late on Friday, following an upgrade by S&P last month, and a positive outlook by Fitch.

Italy's 10-year yield fell 5.5 bps to 3.61% IT10YT=RR. The spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt – widened to 103 bps DE10IT10=RR.