Euro zone bond yields steady as markets eye Trump tariffs

By Yadarisa Shabong

April 2 (Reuters) - Euro zone bond yields were muted on Wednesday as markets await details of U.S. President Donald Trump's reciprocal tariffs due later in the day and the possibility of an escalation in the global trade dispute.

Trump was poised to impose sweeping new reciprocal tariffs against global trading partners on Wednesday, details of which were still being formulated and closely held ahead of an announcement ceremony in the Rose Garden at the White House scheduled for 2000 GMT.

The German 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, edged 0.5 basis points lower to 2.677%, hovering near one-month lows after having dropped for the past five sessions. Yields move inversely to prices.

Investors have been seeking a safe haven in gold and bond markets in nervous anticipation ahead of what Trump calls "Liberation Day". The format of the duties was unclear amid reports that Trump was considering a 20% universal tariff.

The European Union has a "strong plan" to retaliate against tariffs imposed and set to be imposed by Trump, although it would prefer to negotiate a solution, EU executive chief Ursula von der Leyen said on Tuesday.

"The fact that countries are expected to negotiate means markets are expected to stay on edge for a longer period," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

If Europe can negotiate then the impact would be "fairly manageable and the safe haven bid that would cause yields to come down even further, I think would eventually start to dissipate," Broux said.

Italy's 10-year yield IT10YT=RR was also steady at 3.793%, and the gap between Italian and German 10-year bond yields DE10IT10=RR stood at 111 bps.

French 10-year bond yields FR10YT=RR held at 3.398%.

Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, edged down 2 bps at 2.002%.

Data on Tuesday showed euro zone inflation eased as expected in March and a key measure of underlying price pressures also fell. The looming trade war with the United States, however, poses a threat to the euro zone economy.

Money markets are currently pricing in an 80% chance of a 25 bps rate cut by the ECB in April, and have fully priced in two cuts by September.

"In Europe, we expect weaker growth outcomes to outweigh inflation concerns for the ECB, taking front-end yields lower and curves steeper," Goldman Sachs said in a note.

However, with eventual fiscal loosening in Germany, Goldman Sachs expects 10-year bund yields to stay near current levels, estimating yields of 2.80% from an earlier forecast of 3% by end-2025.

"The path of least resistance ...is towards lower yields until we have better visibility that the economy is not impacted by the tariffs," Broux said.