Euro zone yields fall, markets boost bets on ECB rate cuts after US tariffs

By Stefano Rebaudo

April 3 (Reuters) - Euro zone government bond yields dropped and markets increased their bets on future European Central Bank rate cuts on Thursday as the U.S. tariff announcement by President Donald Trump boosted fears of a trade war which would hurt global growth.

Money markets priced in a 92% chance of a 25 basis point (bps) ECB rate cut in April from around 80% the day before, and a depo rate at 1.8% in December from around 1.9%.

Trump on Wednesday unveiled sweeping global tariffs of at least 10% on goods imported from most U.S. trading partners.

The U.S. administration's tariff hikes should not derail an ongoing decline in inflation in Europe, ECB policymaker Francois Villeroy de Galhau said on Wednesday, adding that the recent fall boosted the case for a fresh interest rate cut.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, fell 8.5 bps to 2.64%, after hitting 2.625%, its lowest since March 4.

On March 5, German yields recorded the biggest daily rise in decades as German parties reached an agreement for a massive ramp-up in fiscal spending on infrastructure and defence.

German 2-year yields DE2YT=RR, more sensitive to the ECB policy rates, dropped 9.5 bps to 1.95%. It hit 1.924%, its lowest since December 12.

UBS now expects the U.S. economy to grow closer to, or below, 1% and the Federal Reserve to cut rates by 75-100 bps in 2025.

"In the weeks ahead, we expect the White House's executive authority to be challenged in the courts," said Mark Haefele, chief investment officer at UBS Global Wealth Management, recalling Trump used the International Emergency Economic Powers Act (IEEPA), which hasn't previously been used to announce such sweeping changes to economic policy.

The yield gap between U.S. Treasuries and Bunds DE10US10=RR was at 141.3 bps after dropping briefly to 132.6 bps, its lowest since March 12.

Some investors expected this spread to shrink further, luring more cash to Europe.

Italy's 10-year yields dropped 6 bps to 3.76%. The yield gap between BTPs and Bunds DE10IT10=RR -- a gauge of risk premium investors ask to hold Italian debt -- stood at 111.5 bps.

The yield gap between French and German bonds DE10FR10=RR was at 72.5 bps, after recently hitting its lowest levels since last summer at around 65 bps.