Euro zone yields rise as markets weigh Trump's tariff plans

Updates latest prices

By Greta Rosen Fondahn

Feb 4 (Reuters) - German bund yields rose on Tuesday, after falling for three days, as investors weighed the impact of U.S. President Donald Trump's paused tariffs on Canada and Mexico and levies on China took effect.

In an instant response, China announced it was imposing tariffs on some U.S. imports. Trump on Monday suspended for a month threatened levies on Mexico and Canada just before they were due to kick in.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose 1 basis point (bps) to 2.395%, after touching a one-month low of 2.359% on Monday.

Yields move inversely to prices.

Rabobank analysts said the market expected tariffs to have an inflationary impact on the euro zone in the short term, and a negative impact on growth, to which the European Central Bank would have to respond by cutting rates.

"The Federal Reserve can adopt a more cautious stance on the inflationary impact as it has more room to sacrifice growth without causing a recession (unlike the ECB)," they added.

The ECB cut borrowing costs for the fourth straight meeting last Thursday, a day after the Fed left rates unchanged.

Markets slightly pared bets on further ECB easing on Tuesday, after adding to bets on Monday, as investors digested the paused tariffs on Canada and Mexico.

Traders were pricing around 85 basis points of further rate cuts for this year, compared to around 90 basis points of easing priced on Monday.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to ECB rate expectations, was up 2 bps at 2.056%.

Markets still readied for more volatility from tariff-related headlines, and braced for Trump to turn his attention to the European Union, which he has said he will target without specifying when.

"The modus operandi of the Trump administration has shifted somewhat, with the policy now being of imposing tariffs first and negotiating later," said Mohit Kumar, Chief European Economist at Jefferies.

Italy's 10-year yield IT10YT=RR was lower by 1 bps at 3.5%, and the gap between Italian and German yields DE10IT10=RR stood at 110 bps.

The gap between French and German yields DE10FR10=RR - a gauge of the risk premium investors demand to hold French debt - narrowed to 72 bps.

French Prime Minister Francois Bayrou forced the 2025 budget bill through parliament on Monday, betting that he has made enough concessions to his rivals to survive an inevitable no-confidence motion.

French far-right leader Jordan Bardella said on Tuesday the worst thing for French people would be continued uncertainty over the budget, suggesting his party would not back no-confidence motions against the minority government.