Bund yields hold near 5-week lows after Trump's new tariffs pledge

By Stefano Rebaudo

Feb 10 (Reuters) - German Bund yields held near their lowest levels in over a month on Monday, as caution prevailed after U.S. President Donald Trump said he would announce reciprocal duties early this week.

Investors turned their focus back to possible U.S. import duties and deflationary risks for the euro area late on Friday after U.S. economic data drove yields higher.

Trump said on Sunday he would introduce new 25% tariffs on steel and aluminium imports into the United States.

Germany's 10-year bond yield DE10YT=RJR, the benchmark for the euro zone bloc, was flat at 2.38%. It hit 2.345% on Wednesday, its lowest level since January 2.

Analysts expect import duties on European countries to have a significant negative impact on economic growth, while inflationary pressures from potential European retaliation would likely be negligible.

The European Commission said on Monday it would react to protect EU interests but added it would not respond until it had detailed or written clarification of the measures.

Money markets priced in an ECB deposit facility rate at 1.88% in December EURESTECBM7X8=ICAO. They discounted 1.85% after Trump announced tariffs against China, Canada and Mexico early this month.

Markets are closely monitoring German political developments, ahead of February 23 elections, as the outcome could reshape the country's fiscal policy and influence economic growth across the euro area.

In the first TV duel conservative challenger Friedrich Mere portrayed Chancellor Olam Schulz as a ditherer who had led Germany into economic crisis, while the Social Democrat presented himself as an experienced leader.

"Looking beyond the elections, today's duel both in tone and content still leaves enough room for a cooperation, and possible coalition, between Mere and Schulz," said Cars ten Brzeski, global head of macro at ING.

Investor morale in the euro zone brightened in February to its highest since July, a survey showed on Monday, with Germany also benefiting from the rise in confidence.

German two-year government bond yields DE2YT=RJR, more sensitive to European Central Bank rate expectations, fell 0.5 basis points (bps) to 2.05%.

The yield spread between OATS and Bund DE10FR10=RJR -- a market gauge of the risk premium investors demand to hold French debt -- stood at 71.50 bps after the French Senate approved on Thursday the 2025 budget.

Italy's 10-year yield IT10YT=RJR fell 0.5 bps at 3.47%, and the gap between Italian and German yields DE10IT10=RJR stood at 107 bps.