German 10-year yields edge up, tariff uncertainty in focus

Updates in European midday trade

By Greta Rosen Fondahn

Jan 14 (Reuters) - Germany's 10-year bund yield edged up on Tuesday, hovering close to multi-month highs, as the focus stayed on the uncertain impact of proposed policies by the incoming U.S. administration of President-elect Donald Trump.

Yields have risen globally in recent weeks as investors pared bets for U.S. rate cuts, while mulling if Trump's policies could boost inflation.

Uncertainty over potential U.S. trade tariffs have kept the markets on edge, while on Tuesday the focus shifted to gradual tariffs after a media report suggesting the U.S. could take a measured approach.

This gave U.S. fixed-income markets a breather from a sell-off, while yields remained close to recent peaks and markets readied for U.S. inflation data on Wednesday.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, initially followed U.S. Treasury yields lower, but was last up just under one basis point (bp) at 2.6%. On Monday it rose to 2.612%, the highest since July.

Yields move inversely to prices.

Danske Bank chief analyst Piet Haines Christiansen said uncertainties over the incoming Trump administration's policies, and the prospect of the "inflation scare" coming back, were driving the bond market.

"The nervousness about what he (Trump) will do... It really keeps the market on its toes, especially the bond market," and this nervousness would likely remain for a while, said Haines Christiansen.

U.S. 10-year Treasury yields US10YR=RR fell 3 bps to 4.778%, but stayed close to the 14-month highs they surged to on Monday.

"The market has latched on to the gradual and incremental element rather than the potential build up of tariffs and the potential end game," said Deutsche Bank's Jim Reid in a note to clients.

Italy's 10-year yield IT10YT=RR was 2 bps lower at 3.809%, after touching 3.855% on Monday, its highest since July.

The gap between Italian and German yields DE10IT10=RR narrowed slightly to 120.5 bps.

In the euro area, European Central Bank policymaker Robert Holzmann said on Tuesday that the ECB could not lower rates too quickly given issues including stubbornly high core inflation.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, was one bp lower at 2.285%.

While Wednesday's U.S. consumer price data is the key inflation measure this week, investors will eye U.S. producer price data due on Tuesday.

A hot inflation print could cement the view that the Federal Reserve will take a slower pace with cutting rates.

The Fed strongly influences the U.S. government bond market, which sets the tone for borrowing costs around the world.

Also in the mix on Tuesday, French Prime Minister Francois Bayrou is expected to lay out in a speech the contours of a deal to water down pension reforms in return for support from the left on passing a budget.

The yield gap between French and German 10-year yields DE10FR10=RR - a measure of the risk premium investors demand to hold French debt – reached 88.1 bps on Monday, its highest since Nov. 27. On Tuesday it was at 85.1 bps.

(Reporting by Greta Rosen Fondahn; Editing by Amanda Cooper and Bernadette Baum)

((Greta.RosenFondahn@thomsonreuters.com))