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

By Stefano Rebaudo and Linda Pasquini

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 U.S. 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.

"I think (European bonds' reaction to Trump's tariff comment shows) a first flight to quality move. Investors are going to buy European bonds in times of high uncertainty," said Nabil Milali, portfolio manager at Edmond de Rothschild Asset Management.

"But they can do it (...) because they know that the ECB (...) will keep on easing thanks to euro strength, falling energy prices and slowing wage growth," he added.

Money markets priced in the ECB deposit facility rate to be at 1.65% in December EURESTECBM5X6=ICAP, from 1.72% before Trump's remarks. They also effectively fully priced in 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 were trading lower on Friday – with the 10-year US10YT=RR down 3 bps at 4.52% - after dropping on Thursday, as the recent selloff drew buyers at more attractive levels.

Data released early on Friday gave an upbeat picture of 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.

German 2-year yields DE2YT=RR, more sensitive to ECB policy rates, were down 7 bps at 1.76%.

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 5.3 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 100.9 bps DE10IT10=RR.