Euro zone yields slip after US tariff ruling, Italian spread hits lowest since 2021

By Stefano Rebaudo and Linda Pasquini

May 29 (Reuters) - Euro zone government bond yields inched down on Thursday as investors worried about the long term economic outlook after a federal court blocked most of U.S. President Donald Trump's sweeping tariffs.

The Trump administration has appealed the ruling, which does not include sectoral levies, and could seek other legal avenues for the president to impose tariffs.

The risks of extended policy and economic paralysis cast a deeper shadow for investors worried about the longer term.

Germany's 10-year government bond yield DE10YT=RR, the euro area benchmark, fell 3.5 basis points (bps) to 2.51%. It fell to 2.513% on Tuesday, its lowest level since May 8.

Wall Street's main indexes rose on Thursday after AI bellwether Nvidia reported a 69% surge in quarterly sales.

U.S. Treasury yields slipped, with the 10-year SU10YT=RR down 5 bps, as economic data and the court ruling reignited fears over prolonged trade policy uncertainty .

It "doesn’t mean the tariffs are now gone," said Lizzy Galbraith, senior political economist at Aberdeen.

Nevertheless, "the ruling undercuts Trump’s negotiating leverage", she added, arguing that countries that were in trade talks "are likely to wait for clarity on whether the block on tariffs is maintained before making big concessions".

Even if the ruling is upheld, the administration will have alternative routes to implement tariffs, but they will be slower and more targeted, as opposed to the current sweeping approach.

Markets slightly increased bets on European Central Bank rate cuts, indicating a deposit facility rate at 1.67% in December from 1.70% late Wednesday. EURESTECBM5X6=ICAP

"(The court ruling) removes some uncertainty, but it adds some," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

The German 30-year government bond yield DE30YT=RR hit its lowest since May 8 at 3.009% and was last down 3 bps at 3.01%.

Long-term bond yields have risen this month on growing concern about rising debt levels among big economies such as the United States and Japan.

German 2-year yield DE2YT=RR, more sensitive to European Central Bank policy rates, fell 2.5 bps to 1.77%.

Italy's 10-year yield IT10YT=RR fell 3 bps to 3.58%. The spread between Italian and German yields DE10IT10=RR was at 96.5 bps, after hitting 90.70, its lowest since February 2021.

According to Barclays, which has recently lowered its target range for the Italian-German yield gap to 70-120 bps from 90-140 bps, the recent tightening "reflects the dissolution of the distinctions between core-periphery euro area government bonds".

Some investors have positioned for a drop in euro area’s risk premiums since early 2025 on expectations that European countries will be forced to unify in light of the U.S. push for the bloc to fund more of its own defence.

More European financial integration means lower risks for highly indebted countries, analysts said.