Bund yields rise to multi-week highs on trade hopes

By Stefano Rebaudo

May 9 (Reuters) - German Bund prices fell on Friday, pushing yields higher, as investors moved away from safe-haven assets after a U.S.-UK trade deal raised hopes for similar tariff agreements elsewhere, boosting risk appetite.

Germany's 10-year yield DE10YT=RR, the euro area benchmark, rose as high as 2.588%, its highest since April 11, and was last up 3 basis points on the day at 2.55%.

U.S. President Donald Trump and British Prime Minister Keir Starmer announced on Thursday a bilateral agreement, which, while limited, has raised optimism that the U.S. will agree further deals, reducing the impact of tariffs on the global economy.

Trump said he expected substantive negotiations with China this weekend and predicted that U.S. tariffs on Beijing of 145% would come down. That helped world stocks to trade near their highest level in six weeks. MKTS/GLOB

But investors are still grappling with the uncertainty around tariffs, and their medium-term implications.

"Markets have somewhat eased economic fears following President Trump’s signals of a trade war de-escalation. However, this relief may be premature," said Johan Javeus, senior economist at SEB Group.

"We expect U.S. data to increasingly reflect the impact of higher import prices and for trade uncertainty to weigh on business investment and hiring decisions."

Unlike in the U.S., where the Federal Reserve fears tariffs could boost inflation, policymakers in Europe think that they will lead to lower prices in the euro zone.

The euro zone's fight to bring inflation back to the 2% target is on track but the growth environment is deteriorating, with a global trade war creating a significant risk in the outlook, Finnish central bank chief Olli Rehn said on Friday.

Money markets priced in an ECB deposit facility rate of 1.65% for December, indicating at least two 25 bp rate cuts from the current 2.25% and some chance of a further move.

They had indicated a depo rate below 1.55% in mid-April when tariff fears were more elevated.

Barclays analysts said a 1.5% terminal rate pricing should be the floor for now, with the ceiling around 1.75%.

"The yo-yo between these levels or beyond these levels would be a function of how the news flow around tariffs evolves and if the hard data eventually matches the weakness in the soft data," Barclays said in a research note.

German 2-year yields DE2YT=RR, more sensitive to ECB policy rates, were up 1 bp at 1.79%.

Italy's 10-year yield rose 3.5 bps to 3.62% IT10YT=RR, leaving the spread over Germany's Bund yield - a market gauge of the risk premium investors demand to hold Italian debt - at 104 bps. DE10IT10=RR