Euro area bond yields rise after Trump extends deadline on EU tariffs

By Stefano Rebaudo

May 26 (Reuters) - Euro zone government bond yields edged up on Monday as the U.S. backed away from its threat to slap 50% tariffs on European imports, soothing fears of a sharp economic slowdown.

U.S. President Donald Trump agreed on Sunday to extend the deadline until July 9 for talks between Washington and the 27-nation bloc to produce a deal.

Germany's 10-year yield DE10YT=RR rose 3 basis points (bps) to 2.60%, after dropping 6.5 bps on Friday.

Trading volumes on Monday are expected to be thin given that markets in the United States and Britain are closed due to public holidays.

Money markets priced in the European Central Bank deposit facility rate at 1.70% in December EURESTECBM5X6=ICAP, up from 1.67% late on Friday. It reached 1.55% after the ECB suggested in mid-April it could cut rates in response to a possible tariff-induced economic slowdown.

Money markets also indicated more than a 95% chance of an ECB rate cut in June and less than a 20% chance of a second easing move in July.

German 2-year government bond yields DE2YT=RR, more sensitive to ECB policy rates, were up 4 bps at 1.80% after falling 7 bps on Friday.

Italy's 10-year yield rose 1 bp to 3.82% IT10YT=RR, after credit rating agency Moody's on Friday upgraded its outlook on Italy to "positive".

The spread between Italian and German yields – a market gauge of the risk premium investors demand to hold Italian debt – dropped 2.5 bps to 96.50 DE10IT10=RR. It hit 90.90 bps last week, its lowest since February 2021.