Euro zone bond yields edge up as markets play it safe amid tariff woes

By Yadarisa Shabong

April 8 (Reuters) - Euro zone government bond yields edged up in less volatile trading on Tuesday after wild swings the day before as traders weighed up U.S. trade policy and hoped negotiations with Washington could help avert an escalating dispute.

The European Commission said on Monday it had offered a "zero-for-zero" tariff deal as EU ministers agreed to prioritise negotiations as U.S. President Donald Trump's broader 20% tariff on the European Union is set to come into effect on Wednesday.

Faced with sectoral tariffs on its steel and aluminium as well as its cars, the Commission on Monday evening proposed its first retaliatory tariffs at 25% on a range of U.S. imports in response to the metals tariffs rather than the broader levies.

German debt, which was a much bigger beneficiary of safe-haven-related flows into European bonds than those of other countries, underperformed the rest of the market.

German 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, rose by around 8 basis points from 2.562% late on Monday to 2.643% on Tuesday afternoon, according to LSEG data.

German yields fell by as much as 25 basis points between the close on April 2, when Trump unveiled his tariffs, and Monday's lows, while French 10-year yields fell around 17 bps in this time and Italian yields, just 8 bps.

Kenneth Broux, a strategist at Societe Generale, said the weaker performance in German bonds could just be "unwinding of risk aversion", as equity markets bounced back.

Euro zone bond prices were volatile on Monday as initial buying due to safety-bids turned to heavy selling towards the end of the European trading session due to a report of a potential pause in tariffs.

However, that was short-lived as the White House called that report "fake news". Yields fell back slightly after that. Yields move inversely to prices.

Italy's 10-year yield IT10YT=RR was flat at 3.861%, and the gap between Italian and German 10-year bonds DE10IT10=RR stood at 121 bps.

'REVERSAL'

"We're seeing probably a reversal of yesterday to some degree," RBC Capital Markets global macro strategist Peter Schaffrik said.

"We see the curve which was steeper yesterday. We see it being slightly flatter."

Germany's two-year bond yield DE2YT=RR, which is more sensitive to European Central Bank rate expectations, rose 8 bps on the day to 1.89%, having hit a 2-1/2-year low of 1.665% on Monday.

Markets are currently pricing in a more than 85% chance of a quarter-point cut by the ECB next week and see the key rate at 1.75% in December. EURESTECBM6X7=ICAP

ECB policymaker Yannis Stournaras said on Tuesday that expected higher inflation and a global trade war following U.S. tariffs could delay the normalisation of euro zone monetary policy.

Market will be looking at responses to tariffs from other U.S. trading partners.

Trump threatened to ratchet up tariffs on U.S. imports from China to more than 100% on Wednesday in response to China's decision to match the "reciprocal" duties announced last week.