Tariff uncertainty keeps euro zone government bonds in check

LONDON, July 10 (Reuters) - Euro zone bond yields edged up in subdued trading on Thursday, as investors awaited the outcome of U.S.-EU trade negotiations before making further moves.

Germany's 10-year yield, the benchmark for the currency bloc, was up 2.8 basis points at 2.66%. It hit a six-week high of 2.668% earlier in the week, but has held steady just below that level since then. DE10YT=RR

Yields edged up over the course of the afternoon in Europe, in line with a rise in U.S. Treasury yields after U.S. data showed an unexpected fall in weekly unemployment claims, which might leave less room for rate cuts this year.

Euro zone bonds are essentially in a holding pattern as investors wait to see what happens in the trade talks.

EU trade chief Maros Sefcovic said on Wednesday that good progress had been made on a framework trade agreement and a deal may even be possible within days, though uncertainty remains high.

Italy's 10-year yield, the benchmark for the European periphery, was broadly trading in line with Germany's, up 3.6 bps at 3.588% IT10YT=RR.

That left the closely watched gap between the two at 92.5 bps.

That spread has been tightening steadily in recent years. It nudged above 120 bps at the height of the tariff jitters in April, traded above 150 roughly a year ago when markets were worried about French debt, and as high as 250 bps in late 2022.

And the moves have been boosting other bonds outside the currency bloc's economic core.

"It seems like the Italian outperformance is spilling over to other peripherals, with SPGBs (Spanish government bonds) continuing their move wider vs (French) OATs," said analysts at Mizuho.

Spain's 10-year yield was 3.31% on Thursday, ES10YT=RR and France's was 3.39% FR10YT=RR. In February the two yields were roughly the same.

But Mizuho added: "The tariff headlines can put the peripheral tightening to the test, as these countries may be more hit by Trump's demands, so be aware."

Moves were even more muted in ECB-sensitive, shorter-dated bonds, with Germany's 2-year yield up 2 bps at 1.879%, and Italy's at 2.14, also up 2 bps. DE2YT=RR, IT2YT=RR

"The front-end of the curve and ECB pricing remains pretty much anchored," said Mizuho.

"We do think that threats of larger tariffs risk a more dovish (European Central Bank)... even though a July cut seems less probable following recent ECB commentary."