Euro zone yields rise after US backs down on China trade, Fed chief

By Stefano Rebaudo

April 23 (Reuters) - Euro area government bond yields rose on Wednesday as markets scaled back bets on European Central Bank interest rate cuts after the U.S. administration allayed fears of a trade war with China.

Borrowing costs were roughly unchanged after a batch of data showed early in the session that euro zone business growth has stalled this month as activity contracted in Germany and France.

U.S. President Donald Trump on Tuesday backed off from threats to fire Federal Reserve Chair Jerome Powell after days of criticisms of the central bank chief for not cutting rates.

Treasury Secretary Scott Bessent, said he believed there will be a de-escalation in U.S.-China trade tensions.

"Trump appears to be backpedalling on the two battles he cannot win - China and Powell," said Mohit Kumar, chief economist Europe at Jefferies.

"It doesn't mean that we will not get further headlines from Trump blaming the Fed, but the market should be relieved that a near term tail risk has been reduced," he added.

Markets recently sold off U.S. assets in favour of the euro, driven by fears of a U.S.-China trade war and concerns that Trump's criticism of the Fed could undermine the dollar's status as a reserve currency.

Germany's 10-year yield DE10YT=RR, the euro area's benchmark, rose 3.5 basis points (bps) to 2.48%.

U.S. Treasury long-term yields fell in London trade -- with the 10-year US10YT=RR down 4 bps -- after slipping on Tuesday as fears that Trump's trade policies could trigger a U.S. economic slowdown provided some demand for U.S. bonds.

Markets priced in European Central Bank deposit facility rate at 1.60% in December EURESTECBM5X6=ICAP, up from 1.55% late Tuesday but below the 1.72% level recorded shortly before last week's ECB policy meeting.

The ECB cut rates for the seventh time in a year last Thursday and warned that economic growth will take a big hit from U.S. tariffs, bolstering bets for even more policy easing.

Germany's 2-year yield DE2YT=RR, more sensitive to expectations for ECB policy rates, rose 6 bps to 1.72%. It hit 1.622% on Tuesday, its lowest level since October 2022.

The yield spread between French and German 10-year bond yields DE10FR10=RR - a market gauge of the risk premium investors demand for holding French assets – was at 75 bps, in the middle of its trading range since early June, after Macron floated the idea of early snap elections.

"In our discussion with French accounts, the majority had the view that despite the seemingly political stability, early elections this year were likely," said Jefferies' Kumar.

"We retain our structural bearish bias on France with an expected trading range of 65 bps-90b bps spread versus Bunds for French bonds."

The gap between Italian and German 10-year bond yields DE10IT10=RR dropped to 114 bps.