Euro zone bond yields set for weekly fall on tariff concerns

By Harry Robertson

LONDON, March 21 (Reuters) - Euro zone bond yields were set for their biggest weekly fall since November on Friday as traders mulled the risks of tariffs and a U.S. economic slowdown, after shooting higher earlier in March on Germany's spending plans.

Germany's Bundesrat, the upper house of parliament, on Friday passed the debt rule overhaul and a 500-billion-euro ($542 billion) infrastructure fund, although bonds showed little reaction to the well-telegraphed event.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, fell 2 basis points (bps) to 2.761% and was on track to fall 11 bps for the week. Yields move inversely to prices.

Analysts at Barclays, Commerzbank and ING said concerns about U.S. President Donald Trump's April 2 deadline for tariff decisions were weighing on sentiment and pushing investors towards the safety of government bonds.

Trump has pledged to put reciprocal tariffs on U.S. trading partners and, although details are scarce, the moves could knock European, American and global growth.

"Following the circa 45 bp increase in yields over the past two weeks, a dovish Fed, passage of the fiscal bill in the Bundestag... and weaker risk backdrop have helped Bunds regain some lost ground," said Barclays strategists, led by Rohan Khanna, in a note.

The U.S. Federal Reserve on Wednesday held interest rates but cut its growth forecasts as it grappled with the uncertainty caused by Trump's stop-start tariffs.

German 10-year yields nonetheless remain 39 bps higher for the month after the announcement of the country's new spending plans - to be funded largely through bond markets - sent yields soaring.

Italy's 10-year yield IT10YT=RR was lower by 1 bp at 3.829%, and the closely watched gap between Italian and German bond yields DE10IT10=RR stood at 106 bps.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, was 3 bps lower at 2.144%.